280: What Does it Mean to Know Your Numbers  

Michele: Hello, my name is Michele, and you're listening to Profit is a Choice. I am so excited to have you join us on the podcast today. I am going to be joined by Courtney Bramlett, who is the director of marketing and operations here at Scarlet Thread Consulting. She also owns her own company, The Good Sower. Courtney is going to talk with me all about what it means to understand your financials. Maybe you've heard the buzzword over and over, know your numbers, know your financials, and it sounds really great, and now it's almost just become this irritant, or you don't know what it means. Today we're going to break it down and talk to you about what it means to know and understand, the financial numbers that are impacting your company, impacting your growth, and that will help you grow in the way that you want to grow your company. So, I'm excited to have you here. Hang around.

Every day, empowered entrepreneurs are taking ownership of their company financial health, and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses in the interior design industry, educator, and speaker, I coach women in the interior design industry to increase their profits, retail, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is a Choice. Hey, Courtney, welcome back again.

Courtney Bramlett: Hey, Michele, thanks for having me. What's this? Our third podcast together.

Michele: I think so. The beginning of many more, I'm sure.

Courtney Bramlett: Yes, that's right.

Michele: So today we're going to talk about something that we keep seeing all the time. It’s interesting. Back in the day, I've been talking about financials. Financial literacy, that term was thrown around a lot. Financial understanding, you know, know your numbers, all of those kind of, I'm going to say buzzwords and catchphrases were the things that people hear a lot more now. But back in, I want to say 2007 and 8, when I started going down this path and really teaching this and building out my financial courses, the Pricing Without Emotion was the one back in the day, this wasn't a topic of conversation. I always kind of made light of the fact that it was kind of like sex and politics and, you know, religion. It was the things you didn't talk about, like money. It was just off the table. People didn't talk about it. And I used to think they didn't talk about it, I've always shared this because they were just being stingy with the information until I realized it's because they didn't know the information. Today, though, it's quite different. You hear you, and I've seen it. There are blogs and podcasts and people are throwing around the word profit like it's confetti. I mean, seriously, it's all over the place. And honestly, sometimes they're not even using it properly or they are using it in such a broad way that you don't know which profit they're talking about. There are so many different points of profitability in a company, and they're just using it as a sweeping term to mean I made some money. You and I decided to do a podcast today and kind of go back and forth and explain what it means to understand your financials. What does it mean to know your numbers and to kind of define it, if we can without getting out our notepads and our, you know, calculators and doing all the math, how can we, with words, describe it in the best possible way for our listeners to really grasp what it means to know and understand your financials so that when they say it, they know what they're talking about and they're not sprinkling it around like confetti. That honestly looks beautiful and sounds great in the moment but it makes a hot mess to clean up.

Courtney Bramlett: Yeah, that's right. And it's crazy, too. Even in an industry that I think is completely different, like interior design, or really any industry that deals with a lot of costs, a very high cost of good area, I think that adds its own challenge into truly understanding the real profit of your business because even your revenue can climb. We've talked about that as the vanity metric, but if you don't truly know what each of those types of profits are, you don't really know how much money you actually get to take home at the end of the day. So, the first thing I wanted to ask you is, you know, interior design, specifically, do you think, like, why is it that much more important for this specific industry to truly understand the financials, how to read a P and L, all those, you know, basic financial understandings, why do you think it's more important for interior designers?

Michele: Well, I don't know if I would say that it's more important for them. I think it's equally important for all business owners to know their numbers, and to know how money flows. When I say know their numbers, I'm going to say it this way. I'm going to try to not use that phrase if I can help it and say exactly what I'm talking about. I think it is important for owners of companies to understand how money is made, how money flows through their company, and how they can determine the money that is left over after everything has been paid for. For interior designers, and others to your point about other companies that have a high cost of goods, what gets them is they are making decisions, if they don't understand how money flows through in the company, they might be making decisions based on the revenue number, meaning how much did I bring into this company or did my team bring into the company on sales, and not making it based on how much money was left over, in gross profit to run the company and how much money was left over in net profit to do other activities. So, if they're not familiar with the different kinds of profit locations in the P and L, they could be using the wrong number for decision-making. That's what we see a lot. Like, I had somebody ask me one time, if I'm charging $200 an hour for design, why can I not take that money and put it in my pocket? Because in their mind, I get paid $200 to do that. I had to explain to them, that's revenue. What comes out of revenue is the running of the operating of the business. And so, by the time we pay all the business, the amount that is allocated for the owner might only be 10% of that number. You know, I don't know. We'd have to do the math. But that could be that you could have come home with $20 and instead, you brought $200 home. I've seen it happen. And then you're stuck because you use the wrong number to make a decision.

Courtney Bramlett: Yeah, that's a really good point. And that kind of brings us to our first topic just for our listeners. What would you say are the top four to five, like key financial metrics or numbers that they need to understand and kind of in order? I know you just touched on some of them and how that process breaks down. But what would you say are the top metrics you would suggest for people?

Michele: Yeah, so I like to start with what I call your anchor points, and that's the term that we use in Metrique Solutions as well. So, if you were to think of your profit and loss statement, I will tell you your top five anchor points are these. First is what is total Revenue or total sales, total income. You might hear it under different terms and based on the accounting program you use. It may use different terminology, but they are all synonyms. That means how much did I sell and how much came into the company. And that includes products and services. If I were to take that total revenue and want to break it down further so that I could have a deeper understanding, I want to know how much of that revenue was made based on service, or design, right, that type of work, and how much was made on product. So now I want to know if I have a business, is it 30% revenue, from design services and 70% that is product based or is it flipped? I do more consulting, and I sell fewer products. I want to know how much money comes in and what are my cost centers and how I am bringing the money in.

After that, we have the cost of goods or cost of sale. And that is what is the money that I am using to pay for the items that are going with that client in the sale. Things like furniture. It might be subcontractor services. So, let's say you're paying somebody to do drawings or you're paying somebody to upholster a sofa for you. You're looking at what the cost is to complete that sale and that is allocated towards the client. I want to know what that number is. I'm then going to break that down. If it's me, I'm going to take the cost of goods and go down a deeper level and go, you know, how much am I paying out for shipping and handling? How much am I paying for storage facilities? How much am I paying for lighting compared to how much I'm bringing in? So, I'm going to start breaking down the cost of goods so that I can understand what it is costing me to serve the sale of the client. Okay, so first is revenue. The second is cost of goods. And you can see how each of these could then be broken down further.

The next is gross profit. Gross profit is the amount of profit. It's one of the first profit points, but it is the amount of profit that I’m making in the business right after the sale. So, you take the sale, you take out the cost to serve that sale, what is left or to, you know, the hard cost for the product. And then you have gross profit that is also in a Profit First model called real revenue. So, then that is the money that we have to run the company. And I'm going to look at that number as a percentage And I'm of the sale of the revenue. But I'm also going to look at it as a hard number to say, can I run my business on that? Because whatever that number is in gross profit, that is the number that if you think about it, you have to pay yourself, you have to pay all of your team, you've got to be able to pay all of your rent and all of your marketing. Every cost that is associated with the operations of the business in general gets taken out of that along with any additional profits or anything. So that's a big number that we look at. Then I would take that number, Courtney, and break it down. How much is the profit from the design? How much is profit from the sale of the product? And then I can do all types of comparisons with that.

The next big number is expenses, operating expenses, or OPEX. You may hear it titled. That is, as I mentioned, what does it cost to operate the business? That is the things like payroll, rent, marketing, cell phones, meals, and travel, and all those kinds of things. All the little stuff that it takes to keep the lights on and the doors open. I'm going to look at that as a full number. I'm also going to go drill down there. What is it costing me in payroll? What is payroll as a percentage of this number? Like there are all types of analysis that you can do, but as just a top number, I want to know what the expense number is. What does it cost me in payroll? What does it cost me to be open?

The last number is net profit. Net profit is the number that if you're looking just directly at the P and L, it is the profit that is the result of removing all operating expenses and all cost of goods from revenue. So, that net profit does a lot of heavy lifting in our business and that is another number that I want to know. Then I'm going to drill down into that number as well as identify what does it need to do in my company.

The top five numbers, as a quick recap, are total revenue, cost of goods, gross profit, operating expenses, and net profit.

Courtney Bramlett: That's a really awesome breakdown. I know you are asked this question, I feel like it is asked all the time, but from the revenue to gross profit, I'm interested in a high-cost industry like interior design. Do you have a standard percentage that you see from revenue to gross profit? So, what percentage would be a good drop? Because I'm sure if you get over a certain level, it's kind of a red flag of what our cost is how we source our products, and things like that.

Michele: Yeah, yeah. So, here's what I would say because I work a lot with window treatment companies as well as interior designers as well as others. In the home building industry, a lot of times a 25% gross profit margin, and in a lot of the renovation companies, a 25% gross profit margin is really about where they are. So, it's on the lower side. For those people who are running trade programs out there, I see somewhere between 18 and 25% as their gross profit margin because they don't have a lot of markups on the trade programs. Right. That's about what I'm seeing. Usually, 18 to 25%. If you are a wholesale drapery workroom, I start to see that in general, and based on how wholesale you are, we can see a lot of times that the cost of goods is somewhere between 25 and 30%. That profit will be somewhere between 65 and 70% or 70 and 75%. If you are wholesale, but you do a lot of, let's say you sell blind shade shutters or you are selling some fabrics or hardware, we may see you more up in that, where I would put a designer that is pretty equally balanced in that 40% to 60% cost of goods, probably lower on the 40% side for cost of goods and 60% profit. If you're an interior designer who is more focused on the consulting side, you're going to have a lower cost of goods because a lot of times what happens is they are sending their clients to go buy retail. In that case, I'm going to see that their cost of goods could probably be 30 to 40%. They would have a higher gross profit margin of somewhere around 60 to 70%. If you are a designer that I would say is doing what we would consider, I'm going to put in air quotes a normal design business where you are selling your time and your expertise, and then you're doing, the furnishings packages to go with it. I see those where we usually say that gross profit is 40 to 60% and, cost of goods are 40 to 60%. Then what we try to do is the goal is always to have the gross profit be higher than the cost of goods.

I'll tell you this at any time, if there is a point outside that you're doing design or some of these things and your cost, your let me back up, your gross profit gets below 40%, you are going to struggle to make the money to do what you need to do. If you are a Blind shade shutter company, a lot of times I see a gross profit to be somewhere between 50 and 65%, based on how they're selling and how they're marking up and what they're doing, and how deep they're going into that. So, you can see that it can vary all along. The lowest are probably renovation home builders to the trade type programs. But when you're getting into more of that retail, 40% is like the benchmark that if your gross profit is under 40%, I mean, you're really having to work hard to make that money. And so, then what we're doing is we're backing up and starting to see, to your point, where are we leaving money on the table? Where are we not charging appropriately for what we're already doing? Where are we having certain buying practices that don't support the profit that we need to make and how do we fix it? Because there's no amount of operating yourself out of not having enough money to operate in the first place.

Courtney Bramlett: What would you say is one of the biggest eye openers is for interior designers or window treatment professionals when they come in and they actually start to grasp some of these percentages in their business. What do you think is the biggest eye-opener and one of the first things that you suggest to them to look at or to update?

Michele: So, one of the first activities we do is we identify the five anchor points on their P and L. And we look at it for the prior year, because there's a whole year of data telling us what's already happened. That's the thing about the P and L. It's the story of the numbers. It's just telling me the decisions that have already been made and now we look at those decisions to see if they're supporting us into the future or do we need to change the story. So, the first thing we do is we look at the five numbers and we look at the relationship of the numbers. You know, it's like anything. I could look at it as a number by itself, which could be a fine number. It's how does it fit into a relationship to the other numbers. And even if it's in relationship to the other numbers, meaning we're in that 40 to 60% band if it's still not doing what we need it to do, it's still not the right number. So, something has to change.

I usually start with identifying the five numbers, identifying their relationship to each other, like the percentages and things. Then I start asking questions. I'm going to ask some feeling questions. I've got some empirical data. I want to know how they feel. So, feelings aren't bad, they definitely are guides. They guide us. Do you feel like you're charging for everything you can charge for? Do you have enough money to do what you need to do in the company? Can you hire the people that you need to hire? Can you pay the taxes that you need to pay? Can you put money into buying a new computer when you need it? Are you being paid as the owner? So, then we're asking questions because I've seen companies and you have been witness to this, I've had companies that if you were to just look at them, might be that they're like, I don't know, $500,000 and below in revenue. That might freak out somebody else who's in that 2, 3, 4 million. But they could be a $500 million revenue or $500,000 revenue company. And the owner could be walking away with $250,000. And you could have, you know, a 2 or 3-million income company over here where the owner is walking away with $75,000. Like, I'm going to take the $500,000 revenue. That's why we call it a vanity metric for revenue only all day long. So, it's, what are the five numbers? How are they in relation to each other? And how are those numbers serving the current and future needs of the business? Because that's what it comes down to is not just what are the numbers, but how are they serving the current and future needs of this company so that we have sustainability and longevity to move forward. That's the knowing and understanding.

You asked another question. I'm going to piggyback on it. You asked, how do they feel when they start to see this? I'm going to tell you how they feel. So, some people, I was sharing this earlier on a consult, a discovery call today. Some people, when they come to me, they're not in dire straits. So, I don't want anybody listening to this, thinking, oh, my gosh, everybody that calls her is in dire straits. That's not true. Some call me because they're like, I've got so much money in my company, I don't even know if I can pay myself. I don't know how much money I can bring home. How do I know how this fits, you know, into what I want to do? Like, how do I make a good decision with the money? They just want to be good stewards of the money. I would tell you that what I say for those people is if we had a car, they would kind of be sitting in the passenger seat, the front passenger, shotgun. They can see where they're going. They just don't have the ability yet to make all the decisions to be in the driver's seat. I have some people who call me, and they're being drugged by the back tire and are covered in road rash. It's a visual. They would be happy to be put in the trunk of the car of their business. That would at least be safer than what's happening. And they're coming to me, honestly. They're battered and they're bruised. They owe back taxes, they have bills to pay, they have debt that they owe, and they're trying to find their way out of it, and they know that the decisions that got them there will not get them out. So, we're making hard decisions. We're cutting, we're adding. We are trying to look at it from all angles. So, I might have that all the way up to, oh, my gosh, my business is making millions, and I want to be a good steward of it, and this is bigger and more, and I need to have a new framework for decision making. It could be anywhere in that range of, oh, help me so I'm excited about my future, help me get there and make really great decisions.

Courtney Bramlett: Yeah. And that brings me kind of like what you said. They might open their bank account, and they see a ton of money, and a lot of times they're just like, is this even my money? I don't even know where that is coming from. Cash flow management is hard. And this is something that's been new for me, just learning more about the interior design business specifically, because when you own primary consulting, your costs are so minimal, and they're very consistent. You’re not, you know, waiting to pay an invoice eight months out in the future. It's very in and out, in and out. So, you kind of have a better grasp on how much money you have, but how would you tell interior designers to have better cash flow management so they truly can look at their account and say, okay, I may have, you know, 20 grand in here, but I confidently know that 6 grand of this is actually part of that gross profit or the net income, things like that. How can they be better with their cash flow management so they can really have a reality check every time they look in their bank account?

Michele: I'm going to tell you, I think this is one of the most under-looked financial aspects for business owners, period. Remember when I said, I kind of started the whole thing about one of the number one things we need to do is understand how money flows in and out of our business. I think many business owners understand the inflow of money, but I don't know if they fully grasp the outflow of money. And by that, I mean just so that we're specific for those listeners, I mean the amount and the timing. Because to your point, it's not just that they have to pay it, it's the timing that they have to pay it. I've taught on this podcast multiple times about cash and accrual accounting. And cash accounting is so much easier than cash in, cash out, cash out, cash in, cash out. Go pull up the ATM and how much money do I have in the bank? That's what I have in the bank. Pull up the, you know, your website or whatever of your banking system. See what I have. That's what I have. Let's live with that and move. Accrual is very different because it is based on invoices and promises to be paid. And what you have to pay out, you might be holding money for a very long time, before you pay things out.

The way that you kind of wrap your arms around this piece is, number one, to understand how your business flows the money is understanding what you need your business to do with the money and then it's putting it in bank accounts. I'm a big believer in Profit First and, having bank accounts so that you can segregate the money for the job that you're asking for it to do. It's about having budgets that you use and then managing a cash flow document. This is what came in. This is what it needs to cover. I'm saving this over here; I'm saving that over there. Because I have seen businesses back to that whole are you like being drugged by the car, you know, with the road rash, or are you driving in the driver's seat? I have seen businesses where they didn't understand the cash and they were making today's cash decisions based on tomorrow's money that's coming in, that's not in. And it can get you in a lot of hot water. You start to need bridge loans and lines of credit and all kinds of things to kind of help you balance it. Well, if you fully know and understand the additional cost of that money, you can make those decisions. But when you're not thinking about the cost and you're constantly behind. We've talked so many times over the years on the podcast about robbing Peter to pay Paul and your Peter and your Paul. And so, you just keep robbing yourself to try to get your way out of it and you can't. So, managing a cash flow document, having a money management system like Profit First, fully understanding how money is coming in and going out. I'll tell you another big part of cash flow management that I think is important and that is truly understanding what it takes every month, just as a non-negotiable to run the company. Meaning what is it going to take to cover payroll? What is it going to take to cover rent? What is it going to take to cover utilities? All those things that are the hard and fast expenses in a company, we need to know those. Then we need to know our variable expenses outside of that. And the same holds true for the cost of goods. It's just another expense account, some of the things we're paying when they happen and the things we're paying later. So, it is really not just managing all of that for our business expenses that OPEX, but managing it for our client cost of goods that we are managing on their behalf.

Courtney Bramlett: Yeah, no, that's funny that you bring up the separate bank accounts, one of your probably most profitable businesses that you've worked with in 2024, I'm sure you'll know who I'm talking about, but she said, she said something like, oh, another bank account. I have so many bank accounts, but I just, well, I'll open another one for that. I thought that was fun because it's kind of a simple concept, but it really does seem like, well, do I really need to do that? But if you can allocate some of that, those funds, so then you can kind of. It's almost like it disappears from your visibility. So, you can kind of forget about that. And then it's there when that time comes up. Can you give an example?

Michele: So let me say this before you ask that just on that, what's so cool about it does disappear from your visibility, but it appears in your visibility when you need to make the decision. When Mike Michalowicz came up with Profit First and started talking about it, one of the big things he said was owners are not running their P and L every day. Now I do, but I'm weird, but in a good way. But most people aren't going, oh, let me go look at my P and L to make decisions. I mean, they might look at it once a week or once every couple of weeks. Some once a month, some never. What they're doing is they're running to their bank account and they're going, how much money's in the bank? Make a decision. But all of the money was sitting in one bank account. So, to your point, the visibility is too much, they saw too much. Then they were making decisions that were not made in a priority order, and that same money got spent over and over and over. So, once you start separating it, then when I go into a specific bank account, I'm going into it with the set of assumptions of what that money has to cover. Well, now I've got a set of things that we're paying, and I've got the money, and I know that there's a direct correlation there. And so, it's adding and removing what doesn't need to be part of the decision-making, which actually brings so much more clarity.

Courtney Bramlett: I think it would be good for the viewers to like, give, give us an example. Let's say I'm an interior designer. I'm maybe on, let's just say three or four projects right now. So, I'm kind of struggling with this. I'm not really sure what part of this money my account I do have. I've got to pay my employees. What are some examples of those different bank accounts? What funds would go into these different bank accounts?

Michele: Well, one of my favorite things to do is to automatically have a cost of goods account. So, in Profit First, it is normally doing the accounts from gross profit down. I like to have a cost of goods account because now what I can do is when I sell a product, I can put all that money into a cost of goods account. I can pay all of the vendors out of that, and now I've never combined it with operating expenses. So, I've never co-mingled funds. So, I'm not going to spend the money that you gave me to pay for that lamp and that sofa to pay for my payroll at any given time. It's not going to, it's not going to be done. I'm not going to accidentally overspend on sales tax. That money's going to be sitting in that bank account. So, I can pay my sales tax out of that account. I can pay all of my vendors out of that account. I can pay the, you know, the shipping and the handling out of that account. I can pay the storage fees out of the account. If it is tied to a product, I'm putting it into that account until I have satisfied that sale, recognized the profit, and then move the profit over into my regular account. Okay. That's one of the first ones. The other accounts that I like to have, I mean, I could. I'm like our client. I could give you a list, but I'll keep it short. I really like having a tax account. In that tax account, we use that to pay estimated taxes on profits in the company for the owner so that we make sure that we never accidentally take home too much and don't have the taxes covered. I love having a vault account, which is a minimum of three, if not six months of operating expenses so that we don't ever feel like we can't make decisions when we get behind. You might have a retainer account, that's a liability account, it's a little different, but you're taking in money from a client that you're spending overtime with milestones on how that money's going to be used. Then a profit account. The whole reason we're doing the Profit First and that profit account is because they allow me to hold money back so that I can give bonuses that we could use for raises the next year that we could do all types of things with. So those are some of my basic accounts. Again, I think the beautiful thing about profit first is a money management system. And knowing your numbers that deeply is how you are literally saying, here's what the dollars do in my business, and I'm going to hold them accountable for doing that job. One of the first ways I'm going to hold them accountable is I'm going to say these dollars do this work, and then I'm going to put them in an account and not touch that account so that when they need to do their job, they have the ability to do it. The reason that we overspend in some cases is because we don't know what we're doing. We don't have a budget; we don't have a plan. We don't know where the money's coming in. We don't understand how the money is flowing out, and we're just making broad, rash, quick decisions instead of well-thought-out pre-planned decisions. That's why a budget is so great. It's not limiting. A budget is just telling your money in advance where it's going to go so you don't have to make another decision in the moment. You've budgeted for it, you've planned for it, now it just gets to happen. It's just like a bunch of decision-making that's off your plate. So, you can just go in the moment as opposed to having to stop and analyze every little step along the way.

Courtney Bramlett: That's a really good point. You've talked about this a couple of times with some clients, but for people that truly want to be profitable, and I don't mean, you know, we talked about at the very beginning that word we've seen get thrown a lot. Profitability is tied to just raising your prices, and of course, that's a piece of it, but there's still a lot more that goes into being profitable. And you know, I remember you telling me, you know, you were talking with one of those people that was kind of hanging on the back of the car, being drugged behind the car, and you kind of had to get real with them on what their lifestyle was currently compared to what it was going to take to be more proactive and profitable. Would you say, that a big piece of this whole journey to profitability is getting real on like take home? Because at the end of the day, you know, you do this, you should have more money at the end of the fiscal year versus oh, I've lived a little more outside my means. And then I'm scrambling and having to, you know, pull credit just to make it to the end of the year. Like, would you say that plays into this?

Michele: Oh, a thousand percent. You know, the kids these days, everything's 100%. 100%. A thousand percent is what I'm going to say. I'm saying kids, and they're probably 30 and under, but my kids are 30 and under so, I guess I could say that. what's so interesting is this. My goal is to right-size our businesses, and when I say right size our business, it means if we're putting in our time, our effort, our skills, and our talent into our company, we expect something back. Most of us expect, outside of an attaboy, great job, way to go, Courtney, we're expecting money because money is the currency that we use to be able to run our home. And so, part of really knowing and understanding your financials and your numbers is what is it that I need the business to do for me? I can remember at a point where, my business, was not doing what I needed it to do. And I remember getting so real with myself, that right size moment, that it's almost like when you go to McDonald's and you order, sorry, McDonald's, and you order all, like, the extra-large fries of everything, and then you wonder why you don't fit in your skinny jeans. Like, and I am guilty. I mean, I don't eat as many now, but man, I could love some McDonald's fries like that and the milkshake, but they do not keep me fitting in my skinny jeans. Well, the same thing happens in business when we're spending money and overspending and doing things in a way that's not supporting what we say we want. Part of that right sizing is these are the resources, the time, the effort, the energy, all the things that I'm going to put into the business. Here's what I need the business to give me back. This is how I need it to work for me. This is what I need to bring into my home. So, part of the exercise, if you are really going deep, whether it's with me or on your own or however you're doing this exercise, is what do I need to bring home? I'm going to tell you. One of the worst things ever is when your spouse or partner says, we really don't need you to bring anything home because I make enough for us to live, I almost feel like that could be a death knell. Why? Because then we are not forced to have good money management. We can be a little bit more, whatever, cavalier with it. But when you're in a position that says, I have to make this work and I need to know what these numbers are and this is the expectation that I have for my business, then we're a little bit more focused on what we need it to do. Knowing how much money do I need to bring in, what do I need a salary to be, and how do I need this to fit? We take that along with you ready for this, Courtney? How much do I want to put in retirement? Because we're not doing all of this so that we don't feed into our own retirement, whether it's your own personal investments or, you know, an IRA of some type, or 401k or savings plan, whatever it might look like for you. But any other of these big businesses around here, they're paying out 401k, they're paying out health insurance, they're doing all these things. We should be building businesses that we would hope would do the same types of things for us. It's identifying what are these needs and then making sure that we are living within the means. We are right-sizing the expectations to the size and the position of the company, meaning if it's a one-year-old company, I'm not going to be expecting it to do certain things. But then making sure that we are living within the means. That's one of the reasons that I focus so much on gross profit and not total revenue. You will see other coaches focus on revenue and it has its place. Like I do look at it, we do talk about it. But the reason that I focus on gross profit so much is that is the number one indicator that tells me if I'm selling it at the right price and paying the right amount in the cost of goods, but it's also the number that is telling me do I have enough to run the company and do what I need it to do as the owner? That number revenue won't tell you that. Gross profit tells you that. And we don't look at it enough, we don't understand it enough and we look at it simply as a percentage of revenue. But it is a heavy-lifting number. And then net profit is the other big lifting number. I've mentioned this over and over and over and over and over. For everybody here that has job descriptions for everybody in their company, go write a job description for net profit. Because net profit does a lot of things in your company. And if we know what it needs to do, what it needs to provide, and what it needs to cover, then we can make sure there's enough in that bucket to do that work. Part of it is right-sizing what we expect it to bring into our home so that we can plan for it in the business. We do backward financials in my program all the time. On repeat. What do you need in your home? Oh, now you need to cover college. Okay. How much more do you need to bring home to cover college? Well, let's go back to the business. Hey, cash machine business. We need more money to come in. So, the way we're going to get more money as well, first we've got to identify that net profit now needs to do the heavy lifting of helping generate money, right? Extra profit so that we can cover college. All right, so once I've done that, well, if my expenses aren't going to change, or maybe they are, maybe I need to hire another person to make the extra money, then I'm going to walk up my gross profit is a combo of those two. Well, what is the percentage of that in relation to revenue? Now, this is how much my new sales goal is. So, it all feeds together. There is not one piece of it that can be pulled out in isolation and celebrated in and of itself.

Courtney Bramlett: Yeah, that's awesome. I love walking backward on the financials. I think that's so powerful and also very motivating. It's like, oh, I really only need to get this one more project at this price and I can get to where I need to be. I think that's always encouraging. But, the last thing I have for you. I know we have some fun stuff coming up at Scarlet Thread, but tell us a little bit about your course, Understanding Your Financials. I know this is something that you built a while ago, and we're kind of shifting its approach and availability, to designers and window treatment professionals. So, tell me a little bit about that.

Michele: Yeah, I love this course. So, the first course that I built was Pricing Without Emotion. I'm just going to tell you a little bit about the history. So, I built Pricing Without Emotion back in 2009, and all of my courses are trademarked and all that good stuff. And I started teaching it in 2010 and started traveling the country teaching it. I mean, large groups all over the country, sometimes multiple times. Well, once everybody started learning how to price their work, then I started teaching them about Profit First believe it or not in 2015. I quickly realized that there was a gap between how I can price it, and I can put it in these accounts. They didn't understand the middle ground, so I stopped immediately and turned the whole thing around and built the one that goes right in the middle, which is Understanding Your Financials. I love all the courses because they all really are to empower people to understand how to sell at the right price, how to know and understand the numbers, and then how to manage them well, which is what we need at the end of the day. We can't do one without the other. And so, in the Understanding Your Financials course, we really go through the profit and loss statement. We really go through the balance sheet, which is, you know, kind of that document that everybody knows is out there, nobody ever really wants to look at, and we understand the differences between them. We really step back and why are they needed and what are they telling us and how do we use them? In addition to that, we start talking about comparison. How do we look at these numbers in relationship to each other? I give you cash flow management documents so that you can learn to manage that cash flow. We talk about it all the way through and what does it look like on your P and L if you're an LLC, how does it look if you're an S Corp? What does it look like on your taxes? How can you follow these things through to follow up, to say, this is what it's going to look like. I'm not teaching you tax prep, but we have to understand how these numbers are used so that we can then be prepared when we move into a Profit First or a Master Your Profit type of situation. How do we save the dollars? It's really putting together the puzzle pieces of our financials so that honestly, all the things that we talked about today, the budgeting and the cash flow and how do I scale this? How do I grow it? If I add in here, what does it do here? Backward financials, top-down, bottom-up, setting the goals, setting the plan. All of that is covered in this course because it is meant to springboard you, it's assuming that you're pricing. And it is saying, this is how you can know. But here's the cool thing. You could get into that course and realize I'm not pricing. Okay, well then, you'll know to go back and take that course. You could be in there and go, I'm going to get this on lockdown now. I need to know how to segregate the money and a Profit First model. So, it really is that middle ground. It's a lot of heavy lifting to be able to know, read, and understand the documents. We also, offer three months of Metrique Solutions in that course so that not only do I teach you how to do it all, but we give you the tool to actually put your own financials in and see it in front of you.

Courtney Bramlett: Yeah. And I know we've done a couple, of your courses where we've turned them into eight-week group coaching programs. So, this specific program will actually have four coaching calls which is super unique and we've seen a lot of great feedback there. So, that one starts in March, which is crazy that we're, we're getting there. But for anyone who's listening and would like to join, if you go to ScarletThreadconsulting.com and then go to the courses tab, you will see all the information on this upcoming program. Also, if you're on the website now listening, you'll see it down at the bottom it’s the call to action. So, we'd love to have you. Michele, it was such a pleasure to come back on and talk about all things financials.

Michele: Let's say that somebody's listening to this podcast a year or six months out, and the live teaching of the course has already passed, you can still go onto my website under courses and take the course. You can still do it. You can still ask questions when you're in the course. There's a question box in there. The difference is once a year I am offering an opportunity to do group coaching and exercise through it, and that opportunity is coming up for 2025, very shortly in March. We'd love to have you join us in that. But if not, no fear. Don't feel like you can't take the course. You can still take the course at any time. Honestly, if you join any of the other consulting packages that I have, like Designer's Inner Circle or Strategic Coaching, you have access to all of this all the time, as part of all of those programs as well. Our heart over here at Scarlet Thread is for everybody who is listening to know and understand their numbers. I really believe, and I say this as a tagline and have since I started the podcast in 2018, Courtney, that profit doesn't happen by accident, and my other tagline on my email is what you own, you can change. The more that we just take more and more ownership of the numbers, knowing what they are, knowing how they work in relation to other numbers, it's a bite at a time. It's a language. That's why they call it financial literacy. It is truly a language. But when we can start to practice and master pieces and parts of it, then it creates stress relief. It creates the ability to make better decisions, quicker decisions, and decisions that are moving us in the direction that we want to go so that then when we are moving into the future, we are not getting there by accident, we're getting there by intentionality. And you, know as well as I do, in all of the coaching that I do, the three big things that I'm trying to teach people are how to have a strategy, so a strategic plan or some type of a plan for where you're going, how to build your financials in alignment with that strategy so they're not fighting or at war with each other, and then how to have a framework for decision making. Within the confines of understanding your financials in this particular course, that's exactly what we're trying to do so that profitability doesn't happen by accident. Courtney, thank you for the questions and thank you. And I look forward to what you're going to ask me next.

Courtney Bramlett: I know, me too. We'll see you then.

Michele: All right, take care. Bye.

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