Start with the PnL

As I sat in my first-ever formal board meeting, I handed over a printed copy of a 25-slide deck.

My co-founders, exec team, and everyone had spent two weeks working on it.  Every word was chosen, every box aligned, and each chart carefully crafted…

Ric, the Billionaire CEO/Co-founder of Red Ventures flipped through the whole thing in under 60 seconds.

He ripped off the first 24 pages and stared at the last page: It was the one we worked on least.

It was a trailing twelve-month PnL "appendix" page we threw in just for completeness.  He stared at it, and I looked at Nick, my co-founder, nervously.

Then the questions began…

And they went on and on like that for the entire, painful 2-hour board meeting.

Lucky for me, Ric has a heart as big as his brain.

So afterward, we grabbed lunch more informally.

My only question was:

How did you figure all that out by looking at ONLY the PnL??

Here is a summary of 3 things he shared with me that every entrepreneur or investor should know:

Preface: the PnL, (especially on a monthly basis) in any business is one of the best places to learn about what happened, without any story or spin.

It has all the numbers and inherently shows trends. 

Paying attention to those numbers, especially against a plan, gives you rich information about that business.

Even more zoomed out, accounting for the business is one of the most critical factors all great entrepreneurs master.

If you look at a public company, you think in quarters or years.  But most companies - especially startups - live day-to-day.

They run new experiments, they make impactful hires and they crack new markets. 

They are immature and move quickly.

This comes through in a monthly PnL by looking at the trends.

In that meeting, Ric could tell we hadn't "figured it out" because our monthly numbers were all over the place.

I remember him sharing that he knows something is exciting when each month grows consistently and the growth rate is ticking up.  Those outputs often show the inputs are working.

This is often the most overlooked metric and arguably one of the most important.

One of my favorite sayings (even prior to meeting Ric!) -

It's sort of a dorky accounting joke but here's what it means:

Investors like Warren Buffett evaluate companies after all expenses including taxes and working capital. They only want to know the "free cash flow" that comes from the business.  That's what they get to work with as an investor.

As an entrepreneur/executive, YOU get to work with all the cash that comes after you sell/deliver your product and service. 

That's what you use for hiring, marketing, and other growth.

First, let's go back to Accounting 101:

🛍️ Ecommerce

For an ecommerce business, that is usually the product, shipping, any fulfillment/tech expenses. Typical profiles here are 50%, but I aim for closer to 70%.

Here's a recent PnL from one of my companies.

👩‍💼 Service

For a services business, it's usually the people directly performing the services like creatives or account managers.

For example, at GrowthAssistant, it's what we pay our global employees. Typical profiles here are 40%, I aim for 60%+

🖥️ SaaS

For a SaaS business, it’s typically servers and support. Typical profiles here are 70%. I'd aim for 85%

This is a PnL from the SaaS company I started:

📰 Media

And for a media/information business like Bootstrapped Giants, it's usually the cost of making the media (like me writing this email).

Typical profiles here are 70%, and I'd aim for 90%!

Of course, this is a lever you can control, ESPECIALLY in a services business.  If you can do the same service with one person instead of two, your margins go up, a lot!

Now, back to my dorky joke about gross profit being an entrepreneur's free cash flow. A $10M business in each of the 4 segments has different gross profits:

• $5M 🛍️ Ecommerce

• $4M 👩‍💼 Service

• $7M 🖥️ SaaS

• $7M 📰 Media

All $10M businesses are not equal. The point of my saying is: the above is what each CEO has to play with to do everything else: marketing, sales, admin, recruiting, new R&D, etc, etc.

Gross Profit is the oxygen!

Three important takeaways here:

1) Pick businesses based on their gross margin profiles

When I got into ecommerce, I didn't look at any category under 50%. If I had less dollars to play with, it’d just make something hard even harder.

When I build services businesses, I price/build around a gross margin target of 60%+.

Yesterday, I spoke to an agency owner who hadn't done that and was breaking even on gross margin.  He'll figure it out but he has to build/restaff everything!

2) Optimize Gross Margin

At Ampush, this was a KPI leaders were held to and evaluated on.  They had to submit example plans that included their headcount costs for each client and how they would maintain and grow margins of each account.

For Unbloat, we are constantly trying to cut back product, 3PL and other expenses.

3) Understand how "overhead" or "fixed" expenses impact the top-line and margins

I put both in quotes because under gross profit goes your sales, marketing, R&D, and admin costs.  People often call these overhead or fixed, NEITHER of which is true.

In fact, the investments there tie DIRECTLY to the revenue growth or gross margin improvements.

If you're a services business with engineering/tech expenses, if those expenses are increasing, do you see growth or margin expansion coming from them?  If not, start to question them.

Similar to the trends, when you put more money into sales, does revenue increase faster than your investment?  If not, you may have a problem.

Use the PnL to evaluate these investments and keep yourself/your team honest.

Most of your people will always ask for more resources, that's a normal response from executives and employees to a CEO.

The monthly items of marketing, sales, R&D, etc can show whether or not an executive is a good steward of investment.

• When you give them more money, do they produce more?  If so, why?  If not, why not?  The point isn't to beat them up but to learn/understand together to get better.

I typically recommend looking at Sales, Marketing, R&D etc as a % of sales and % of gross margin and track it.

• How does it evolve?  Ideally, every "fixed" expense slowly becomes a lower and lower % of revenue (that means your profits are increasing).  If you have a bad month, you'll see these ratios spike.

As our lunch came to a close, I excitedly told Ric about a new opportunity Facebook had presented to us.  He patiently asked me how much it would cost and what benefits it would lead to.

I excitedly shared: “$5M in incremental revenue!!”

He stared at me: "…But how much incremental profit?"

I didn't know the answer. ❌ First strike.

When I did the math, the incremental profit was not compelling.  ❌ Second strike.

Luckily for me, I learned fast and realized we could instead spend that money scaling a few clients.

This would be a much more PROFITABLE decision. I switched gears and avoided the strikeout.

He smiled and said: "Jesse, you can't take revenue or valuations to the bank…”

“The only thing the bank accepts is PROFITS."

And that's the point of this email.  Learning your PnL, analyzing it, and seeing all these pieces are in service of the number one thing you need to build a Bootstrapped Giant: Profit.

Have a great week!

-jesse

PS Want to meet me and Andrew, my partner in BG, in person? We're hosting a few meetups. We'll start in Saint Louis and Austin, but we'll expand beyond that soon. Get your invitation here.