May 27, 2025 • 47 mins
Ever wonder why your business shows profits on paper but your bank account tells a different story? Rocky Lalvani, the Profit Answer Man, joins us to shatter conventional accounting wisdom with a simple yet revolutionary approach: take your profit first.
Most entrepreneurs follow the traditional formula of sales minus expenses equals profit, making your financial reward an afterthought—whatever happens to be left over. Rocky flips this equation, teaching that successful businesses approach it as sales minus profit equals expenses. This fundamental shift ensures you get paid first, forcing your business to operate within its means.
Through riveting breakdowns of real-world scenarios, Rocky illuminates why even businesses with strong sales often struggle financially. From e-commerce sellers battling slim margins after marketplace fees to service businesses failing to account for their own time, the root problem usually traces back to incomplete math from the beginning. "If you didn't do the math on your business when you started," Rocky explains, "how did you know it would be profitable?"
The conversation takes a fascinating turn examining the cash conversion cycle—how long it takes for a dollar invested to return with profit. For many e-commerce businesses, this cycle stretches beyond 160 days as products move from manufacturing to customer delivery to payment processing. This extended timeline creates a dangerous trap where growth actually threatens survival, as each new sale demands more cash before previous investments return.
Rocky's airplane analogy perfectly encapsulates the entrepreneur's journey: "Running a business is like flying an airplane—you need to know your destination, have enough fuel to get there, and constantly course-correct along the way." Many businesses crash because they build an aircraft designed to carry more than it can handle, without enough runway to take off or fuel to reach their destination.
Whether you're just starting your entrepreneurial journey or working to scale an existing business, this episode provides the financial clarity needed to build a company that serves your life rather than consuming it. Visit ProfitComesFirst.com to access free resources that will help you implement these principles right away.
How to connect with Rocky?
Website: https://profitcomesfirst.com/
YouTube: https://www.youtube.com/@profitanswerman
Facebook: https://www.facebook.com/ProfitComesFirst
Linkedin: https://www.linkedin.com/in/rocky-lalvani/
Instagram: https://www.instagram.com/profit_answer_man/
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome everyone to the Firing the man podcast, a
show for anyone who wants to betheir own boss.
If you sit in a cubicle everyday and know you are capable of
more, then join us.
This show will help you build abusiness and grow your passive
income streams in just a fewshort hours per day.
And now your hosts, serialentrepreneurs David Shomer and
(00:22):
Ken Wilson.
Speaker 2 (00:24):
Welcome back to the Firing the man podcast, the show
where we share the stories,strategies and systems behind
entrepreneurs who have takencontrol of their future and
fired the man.
Today, we're joined by a guestwho's all about flipping the
script on the traditionalaccounting formula in making
sure that entrepreneurs actuallyprofit from their hard work.
(00:46):
I'm talking about none otherthan Rocky Lalvani, the profit
answer man.
Rocky is a certified profitfirst professional who helps
business owners stop livingpaycheck to paycheck and start
putting profit first.
Literally, instead of the oldschool formula of sales minus
expenses equals profit, heteaches a much smarter approach
(01:11):
Sales minus profit equalsexpenses.
It's all about ensuring thatyou get paid first without
sacrificing your values, becausefor Rocky, people always come
before money.
His story is just as powerful ashis message.
As a son of immigrants whostarted over in their 40s, rocky
(01:32):
knows what it means to buildsuccess from the ground up, from
losing his mom at a young ageto becoming financially
independent and living the lifehe dreamed of.
Rocky's journey is nothingshort of inspiring.
Whether you're deep in theweeds of running your business
or just getting started, you'regoing to walk away from this
episode with real, actionablesteps to make your business more
(01:54):
profitable and your life moreintentional.
So let's dive in with Rocky andlearn how to profit.
First.
Rocky, welcome to the show.
Speaker 3 (02:04):
Thank you so much for having me, david, excited to be
here with you today.
Speaker 2 (02:08):
Absolutely, absolutely.
I'm looking forward to it aswell.
So to start things off, youtalk about flipping the
traditional accounting formulato put profit first.
Why do you think so manybusiness owners struggle with
profitability even when salesare strong?
Speaker 3 (02:33):
So A well, when they started their business, they
said they were going to beprofitable.
Maybe they did the math, maybethey didn't, which is part of
the problem.
So the first step is if youdidn't do the math on your
business when you began, how doyou know you're going to be
profitable?
You might've picked a businessor a model that wasn't, and I
think more often than not that'swhat happens.
(02:54):
People buy something and theygo, oh look, I can sell it on
Amazon for double or, back inthe day, ebay, and they thought
they were making money untilthey actually sat down and did
the math and realized they werenot making money, especially
when you compute your own time.
The second thing is there's awhole lot of emotions inside of
(03:17):
business and money.
So you start to make a littlemoney and you start to get a
little revenue.
And then what are we told?
Well, you have to reinvest it,right?
You're not told you need toremove it from your business.
Nobody ever says that to youexcept me.
You should be removing profitfrom your business.
That's the purpose of profit toremove it.
(03:40):
So I think they get stuck up inthat cycle of reinvesting and
most business owners paythemselves last, they pay
everybody else before they paythemselves, and that also
creates another problem.
So they might say, hey, David,I'm profitable.
You go wow, you had, what a 10%profit margin.
(04:01):
That's wonderful.
How much was your salary lastyear?
Oh well, that was my profit.
Oh, wonderful.
How much was your salary lastyear?
Oh well, that was my profit.
Oh oh, your profit was yoursalary.
You made 50 grand in profit,but when you were working for
the man, you were making 150.
Where is your profit now?
Yeah, these are all just thingsthat we see over time across
(04:25):
the board.
They don't appropriatelyallocate costs, they don't sit
down and figure out the businessmodel and they don't do the
math.
Speaker 2 (04:35):
You know, you brought up a really helpful step that a
lot of entrepreneurs forget tomake and I can tell you that
I've started plenty ofbusinesses where I have
forgotten this step and that islooking at the economics of a
sale and whether you know fromthe get go you are going to be
profitable.
And so for people that haven'tgone through that exercise, what
(04:56):
are some, some tips that youwould give them?
Speaker 3 (05:01):
The whole thing is a simple equation and when you put
everything into the equation,you can go backwards and
forwards through the business.
And what we do is we look atthat business with three
different drivers and each ofthe drivers has about five
leverage points.
(05:21):
So the first driver is how dowe drive sales?
Well, sales is pretty simplehow many people are interested
in your product?
What percentage of themactually buy the product?
So that's your marketing salesconversion cycle.
When they buy your product, howmuch is it?
So if something's $10 andsomebody buys one, well, you
(05:43):
know your revenue is $10.
If you sell 10 of them, now Iknow my revenue is $100.
This is not calculus, right?
It's basic, not smarter than afifth grader math.
Now the question is do they buyit once or do they buy it every
three months?
So now, if I've got 10 peoplebuying 10 items and they buy it
(06:05):
once a quarter, now I know Ihave 40 sales at 10 bucks a
piece.
So I know I made $400.
You can add all the zeros youwant.
It's irrelevant whether it's400, 400,000, 4 million, it's
just zeros at the end of thenumber.
The math is all the same.
So the first part is how do wedrive the revenue?
(06:27):
The second part is how do wedrive profit?
So that's the next bucket.
So when we look at drivingprofit, well, if I'm going to
sell that for $10, I had to payfor it, didn't I?
There was a cost of making it.
Let's just say it's $3.
So now, every time I sell one,my gross profit is $7.
(06:48):
But that's not all.
There is right.
You don't just sell it and payfor it and you're done.
There's a whole lot of overheadand there's sales and marketing
.
So how much did I pay for myadvertising, my salesperson, my
marketing, to drive that sale?
How much did I pay for overhead, your telephones, your software
(07:13):
, all that other stuff?
Maybe you've got admins who putup the posts in whatever social
media, all of that stuff.
What is it costing me to run mybusiness?
Let's just say, for argument'ssake, all of that stuff together
adds up to $6.
So we had $10 minus three, Ihave a gross profit of $7 and $6
(07:35):
to run my business.
Now I have a net profit of $1.
All right, that's not bad.
10%, not the end of the world.
The next thing is driving cashflow.
This is where nobody looks andthis is where it gets scary, and
this is why most businesses getin trouble.
I just sold a bunch of thesewidgets.
(07:57):
I'm not going to do the math,but let's just say my net profit
was $100,000.
But I now need to order morestuff and it's coming from China
and it's going to take sixmonths and they want a deposit
and then I got to pay for itbefore it gets on the ship.
That order was $200,000.
(08:17):
My $100,000 net profit went intoa minus $100,000 in cash flow.
Right, amazon's good.
They pay you immediately.
Not everybody pays youimmediately, depending on the
thing.
If I've got stuff in accountspayable or accounts receivable,
that means I turned into a bank.
(08:38):
So maybe there's $20,000 thatpeople still owe me.
Now I'm minus $120,000.
Nevermind, I had to orderinventory while I had inventory
on the shelf thousand dollarsthat people still owe me.
Now I'm minus one hundred andtwenty thousand dollars.
Never mind, I had to orderinventory while I had inventory
on the shelf, I still had thirtythousand of inventory on my
(08:59):
shelf.
Now I'm minus what?
One hundred and fifty thousanddollars, even though I was
profitable.
And so, understanding all thesenumbers, understanding how you
source goods, how you pay for it, what your terms are what your
gross profit margin is, how muchyou're selling on sales and
marketing.
All of that stuff needs to justbe calculated like that and
(09:21):
literally you can do it on abasic calculator with a plus
minus times button.
This isn't rocket science andwe teach all of this all the
time, so we teach it on thepodcast Profit Answer man.
We have a free giveaway.
We give away all this stuff,like you can.
Everything we do for ourclients, we teach and give away
(09:43):
because some people want to doit themselves and some people go
.
You just do that for me.
Speaker 2 (09:49):
Absolutely so.
The exercise that you outlined,where you're going through your
sales price and your unit costand all the costs of your
business, that is an exercisethat I do in my business and I
call it fail on paper and I havea criteria for pass fail.
Am I gonna move forward withthis product launch or not?
And I can tell you, had I gonethrough this exercise, there are
(10:13):
hundreds of products that Iwould not have launched in the
past, and so I'm curious whensomebody goes through this
example or through this exercise, where do you draw the line on?
This is something that is thatis a good idea and you should
move forward with, or this is abad idea, that margins are too
(10:35):
tight and it's going to fail?
Speaker 3 (10:39):
So, at minimum, at minimum, you want a 10% profit
margin, but if that's whereyou're starting, you're screwed,
because 10%.
You know, what I outlined foryou was a whole bunch of
different steps.
Let's just say each step wasoff by 1%.
(11:00):
Well, if each step was off by1% and you're 10% and there's 10
steps, you have the possibilityof making zero.
Why are you doing all this workfor nothing?
Like I want that number to beas high as possible, or we don't
(11:20):
do it.
But I was going to ask you aquestion, so A congratulations
on doing that.
When you talk to people abouthow you do that, do people go?
What Do they go?
Yeah, I do that too.
Like, is that a normalconversation?
Speaker 2 (11:37):
I don't think so.
I don't think I.
When I talk to people, it oftenseems like and I will say I'm a
retired accountant and so thisis in my nature to do, and I
think a lot of people would lookat it and say, oh, of course
David does it, he's a retiredaccountant.
However, it is not that hard.
(11:57):
You don't need an accountingdegree to do it, and I'll share
with you my pass fail rule.
I focus very hard on what's mylanded cost, so that's going to
be my unit cost, plus anypackaging, plus any labeling,
plus my transportation cost.
What does it cost to get thisitem in sellable form?
(12:19):
In the location that it'ssellable, say that's $10.
Location that it's sellable,say that's $10.
I need the average sales priceof products like that to be 4x
my landed cost, and so that's arule that I use.
Now, if I'm thinking aboutlaunching 10 products, I will
line all of them up next to eachother.
Sometimes it's 5x, sometimesit's 3x, but that's helpful.
(12:43):
That exercise is helpful in mespending my dollars on the
highest ROI items.
So that's the exercise that Igo through, and I am shocked at
the number of people that don'tgo through that exercise.
Speaker 3 (13:00):
And that's why I asked you the question, because
I have found very few people doit and it saves you a lot of
heartache and a lot of problem.
I like your Forex number.
It gives me a lot of margin forfailure throughout the system
and I don't think people realizethat.
And especially if you'reselling on Amazon, I mean, let's
just go work backwards.
(13:21):
Even if I'm buying something.
So it's a $10 item, your landedcost was 250.
When you say landed cost, isthat into amazon's warehouse or
your location to ship it toamazon into amazon's warehouse?
All right, so we're deliveredinto amazon for 250, so ten
dollars.
Hi, you know these numbersbetter than me.
(13:43):
What does amazon take?
Like 35 percent.
So I um, I would say it'sapproximating 40 to 50 percent
oh, all right, so if it goes infor 10, they take five.
That leaves you five dollars,right, and that includes the
rent and the storage and allthat stuff.
(14:05):
Correct, ok.
Does that include advertising?
Or do we need to do marketingon Amazon on top of that?
Sometimes that includesadvertising, all right.
So at this point you're makingtwo dollars and 50 cents.
Do you ever have to deal withshrinkage?
And by shrinkage I mean stuffdisappears, of course, of course
(14:26):
.
Speaker 2 (14:27):
So what percent disappears.
You know, I would say, like, onreturns, I would say between
five and seven percent onreturns, things going up,
missing, things being returnedand then not being able to be
put back in inventory, I wouldsay between five and and 7%.
Speaker 3 (14:44):
So now you're at another $0.70 out.
So now you're at $4.30.
Sorry for all the math people,but this is what you got to do.
So at this point, if you pay$2.50 for it, you've got $1.80
in profit, but we still havemore to go, by the way.
But we still have more to go,by the way, from the time you
(15:06):
buy something or pay for it howlong?
Till you actually get your cashback.
Speaker 2 (15:11):
My cash conversion cycle this year, which is a KPI
that I was heavily focused on,was 162 days.
Speaker 3 (15:19):
Whoa.
So you're a bank loaning outmoney for 162 days and we didn't
factor that in yet, did we?
We sure didn't.
So let's just say you had topay 10% to borrow that money,
which I don't think isunreasonable for somebody
starting out.
We're now down to $3.30.
(15:40):
That leaves you 80 cents to runyour business.
Now you still have to run yourbusiness, right?
I mean, you've got a phone,you've got a computer, maybe
you've got some people who haveto put the ads up on Amazon, the
VA.
I don't know how you do thatfor 80 cents and pay yourself,
(16:00):
unless you got ungodly amountsof volume.
Speaker 2 (16:04):
Yes, and this is something that we touched on a
little bit before we hit record.
But I would like to dive intokind of the economics of an
Amazon sale and where you seesuccessful e-commerce
entrepreneurs, because this veryexercise in what you're
outlining is something that I'vebeen living for eight years and
(16:26):
a lot of people look at that 4Xrule and they say, oh, that's
price gouging and that is aminimum requirement to keep your
head above water.
Speaker 3 (16:38):
The only price gouging is Amazon.
I don't disagree with that.
They're taking a lot of moneyfor that sale, yeah.
Speaker 2 (16:49):
Let's talk about this a little bit more.
I mean, for people that aregetting into e-commerce and I'm
sure there's a bunch of themlistening right now that's a
question that they have is do Igo the Amazon route, do I go the
Shopify route?
And you work with a lot ofe-commerce entrepreneurs, so
where do you see your moresuccessful clients placing
efforts on in terms of saleschannels?
Speaker 3 (17:11):
So if we're going to a channel that takes all our
money, we've got to have betterthan that margin you're talking
about, because otherwise it'sgoing to be extremely difficult.
Second of all, if we're goingto go through a platform that
takes all your money, I want todo anything and everything I can
(17:33):
to figure out how to convertthat client from that platform
to mine.
Because if you think about it,if I sold that same item on my
platform, what was the cost goes?
You may be 10% versus 50%.
So I just picked up ungodlyamounts of money.
(17:56):
So the question is how do Imake that conversion and how do
I do that Now, before we evenget there, right, somebody
else's branded product isprobably never going to have
those margins.
So you've got a private label.
You've got to find somethingdifferent, unique, like that's
(18:19):
all pre-planning that we don'teven need to get into.
I'm sure you'd cover that onother shows, but you've got to
have a competitive advantage.
So now the question is how dowe get them off of this platform
and onto ours?
Because that's the only waywe're going to make money at at
scale.
Or we've got eight to one orten to one type of margins
(18:42):
because we're selling a productthat has a very low cost of
creation but a high perceivedvalue, and that there are those
out there.
Um, usually it's when you'rethe inventor right, or in a
sense you're the inventor ofsomething like that.
I don't know, have you ever,have you been able to take a, a
(19:06):
regular item, and create thatkind of margin, and not so much?
Speaker 2 (19:11):
In other words, taking something and putting a
brand on it or changing it, oryou know, I would say at this
point in time I have probablydone between 2,500 and 3,000
product launches, and so I canidentify examples at the far end
of the bell curve that havegreat margins and are a success
(19:32):
story.
Now, if I look at the far endof the bell curve that have
great margins and are a successstory, now, if I look at the fat
part of that bell curve, veryinfrequently am I having rock
solid margins, and I think therehave been.
I've gotten better at that.
But one example or one instancethat I found, and if you think
(19:53):
back to economics class ofsupply and demand, what I found
on Amazon is and let's just usea $20 product where you go to
PPC, you will find a keywordthat converts at 10% and
(20:16):
magically the price will be adollar because the supply and
demand for that keyword pushesit towards breakeven.
And I have experienced that andI have seen it with a lot of
other e-commerce entrepreneurswho have great margins or decent
margins before PPC, but whenthey look at the supply and
demand of keywords after PPC,they are approximate breakeven
(20:41):
and that's a tough situation tobe in.
And so I've seen that withFacebook ads, google ads and
Amazon, ppc in particular.
On PPC in particular, and itseems like there are other.
There are like influenceroutreach is one where it takes
some legwork, takes somerelationships.
There is not a competitivemarketplace for supply and
(21:03):
demand of influencers as thereis for keywords, and so the
keyword market is very efficientand I think it pushes you
towards breakeven.
What do you think about that?
Speaker 3 (21:15):
Well, whenever you have something with a fat margin
, you're going to attract peoplewho are going to come after
those fat margins.
So every time you think you'vemade it, you need another
product, because that's what'sgoing to happen.
(21:35):
Influencer marketing I haveseen nothing but headaches with
this, and the headaches are someof these influencers are nutty
and you're putting yourreputation on them.
Influencers are nutty andyou're putting your reputation
on them.
(21:55):
The influencers fight eachother behind the scenes.
So if your influencer ispromoting your product and
another influencer who doesn'tlike that influencer is funny
gets that one, your product getscaught in the crossfire.
Yeah Right, there's all theseother things going on behind the
scenes.
It's it's just work, it's allyou have to play the game.
(22:22):
You have to be nimble On top ofthat and we haven't even
touched on it.
The other person you have tofight is the man, amazon,
because somebody who's yourcompetitor might put a case
against you and it's not eventrue and you can prove it.
(22:45):
Good luck, because you know, ata tech company, nobody answers
the phone because, you know, ata tech company, nobody answers
the phone.
Speaker 2 (22:59):
Yeah, yeah, no, you're absolutely right, and
that's something that you weretalking about.
You know, a message to Amazonsellers is, you know, try to
push them over to your ownplatform, and it's something
that I run into.
You know, there's a saying thatI really like, and people who
have listened to the show haveheard me say this a hundred
times A clean conscience is acomfortable pillow, and when I'm
running my Amazon brands, I amvery conscious of following
(23:21):
terms of service.
There's certainly sellers thataren't, but I am using the
income from these brands tosupport my family and I want to
do everything in my power to bea good Amazon seller, because
there are a lot of ways to getyour account turned off, even if
you are making best effort tooperate within the terms of
(23:42):
service, and so I think that'ssomething that people have a
tough time, and I'll use productinserts as an example.
Product inserts with QR codethat take people to your website
against the terms of service.
Is it an effective way ofpushing traffic towards your
website?
Certainly.
However, it presents this oddscenario of well, what do I do?
(24:08):
I know what's best for my brand, but also I want to operate
within the rules, and so I'mcurious as you work with
different entrepreneurs, haveyou found any effective
strategies to push traffictowards a website that are by
the book?
Speaker 3 (24:27):
That's a good question.
That was the question I wasgoing to ask you.
Do we have to follow the book?
So, depending on the product,online instruction manual, that
that kind of gets them into yourecosystem?
(24:49):
Ecosystem?
Um, I don't know, how do youcreate a hook that makes the
person so the?
Really what you want to do isbuild a brand and build.
So you've got all thesedifferent products.
How do we build a brand aroundall these different products?
So, instead of going to,they're looking for the brand
(25:11):
and somehow doing it.
From that standpoint, I thinkis big.
What other ways could we getthem off?
Yeah, amazon's got so manyrules and it's difficult to be
able to do that without breakingthe rule.
Sure, have you found ways tokind of get around it.
Speaker 2 (25:35):
And if you don't want to say that's totally
understandable, because no, Iyou know pricing is one that is
not against terms of service.
I do not believe everyonelistening check into this, but
it can impact your results onthe algorithm.
So if you have something listedon Amazon for $19 and you have
(25:57):
it on your website for $16,amazon may see that and punish
the algorithm.
Speaker 3 (26:04):
They will punish you, they will, and that honestly,
that technically, should beagainst the law On their side.
Speaker 2 (26:16):
If you look at some of the lawsuits against Amazon,
that's often something that getscited.
You're handcuffing businessowners on pricing on their own
website, and so I have not foundthat to be an effective
strategy.
And so I have not found that tobe an effective strategy.
And so now I would say I amscratching the surface on
(26:37):
influencer marketing andstepping up our game on social
media, and then I make adecision on whether I want to
push them to the website or toAmazon, and that's something I
also measure.
You know conversion rates muchhigher on Amazon and so, but the
fees are also higher, and soit's kind of a delicate
(26:59):
balancing act and it's somethingthat you're starting to see
some competitive forces.
You know Walmart's coming onthe scene, timmy is coming on
the scene, and I think that isgood for third-party sellers.
I think competition generallyis good for third-party sellers
because it has not been, youknow, for a long time.
(27:21):
Amazon has kind of been the onlyshow in town, and and so I've
talked about some of thepositives I'll talk about, or
I've talked about the negatives.
You know, on the positive sideof things, if it's a mall, it's
a huge mall.
There's more people coming tothat mall than any other mall in
America and they have abuilt-in trust established with
(27:41):
their customer, where thecustomer knows I'm going to get
this item in two days.
If I'm a prime member, I've gotfree returns for 30 days, and
that trust has taken a lot oftime and investment to build,
and when you start a website,you don't start with that trust
on day one.
It's something you need tobuild, and so there's definitely
pros and cons and, as I kind oflook at my overall e-commerce
(28:06):
strategy, I view Amazon as beinga component of a brand, but not
the lifeblood of a brand.
Speaker 3 (28:14):
You should never.
Don't build a business onsomeone else's platform, and I
don't care if it's Amazon, itcould be Facebook.
Don't build a business onFacebook because if Facebook
cuts you off, you're done Right.
And that's true of any otherplatform, and it doesn't matter
whether they're good, bad orindifferent, it's just if you're
(28:38):
building on someone else's realestate, they own it and you can
find yourself in a heartbeat,cut out.
So how do you be able to dothat?
At the same point, well, thequestion is how much?
And again you go back totraditional marketing channels,
(29:02):
putting stuff into stores.
But again, that's not easyeither and that takes a ton of
work and that takes moreoverhead.
So there's a million otherissues you kind of have to deal
with.
Speaker 2 (29:14):
Yeah, let's circle back on mindset and mindset of
entrepreneurs when they areapproaching big business
decisions like this.
What are some mindset shifts?
And and, and, if you can getinto the flipping the accounting
equation on its head.
Speaker 3 (29:33):
So probably, at first , the whole principle of it is
sorry.
Sorry because you're anaccountant, right?
Accountants say sales minusexpenses equals profit, which
means your profit's a leftover,it's an after the fact,
something that occurs based oneverything else, whereas profit
first says it's sales minusprofit equals expenses.
(29:57):
So now you're taking yourprofit first and you have a
leftover and you're going tohave to figure out how to run
your business on those expenses,and if you can't, well then you
don't have a profitablebusiness, so don't do it.
And so it's just flipping theway you look at that equation
(30:17):
and it's built on an age oldprinciple of pay yourself first
and that's all it is.
Principle of pay yourself firstand that's all it is.
Just pay yourself first, and ifyou can't, your business is
broken.
This isn't about greed, it'snot about anything else, it's
just like, hey, you should payyourself first.
Speaker 2 (30:35):
Yeah, for the people that go through this exercise
where they are looking at, okay,I'm going to do the profit
first equation, this is what I'mgoing to do next month, and
they notice that they do havetoo many expenses or the
economics of it doesn't work.
What is your recommendation?
And give up and start overisn't an option, because I think
(31:01):
this is something that you know.
I've got a business that I'vehad for eight years.
I've had great years, I've hadbust years and I've had times
where I look at that equationand it's not favorable for
paying myself first.
And so what would you recommend?
Somebody you know, if theyrecognize this is a problem,
(31:21):
what would you recommend thatthey do?
Speaker 3 (31:24):
Pivot, so it's not necessarily starting over.
The question is what needs tochange?
And so when we look at this,the first question is let's do
kind of an analogy.
Running a business is likeflying an airplane, correct?
In the sense that well, let'stalk about it.
(31:46):
When you get in the airplaneand the pilot's there, the pilot
tells you where we're going,correct?
So if we're in LA, he says, hey, we're going over here, we're
going to land at JFK, right.
And so when he goes to take theplane off, you know where your
destination is.
We talked about that.
(32:07):
When you begin sellingsomething, you did the math to
know where your destination was,did you not?
Hopefully there's differentkinds of airplanes Small
business, it might be a singleengine, jet, or not even jet,
but a prop plane versus a 747.
When you're a 747, you're a bigbusiness.
(32:27):
You go up in that cockpit.
There's a million dials,there's a lot of things to take
care of, you're carrying a lotof passengers, employees, along
the way, right?
You need a ton of fuel cash tobe able to get somewhere.
You and I, we run smallbusinesses.
Maybe there's one engine, twoengines.
(32:48):
We don't have that many gauges.
If the sun is shining, I don'teven need gauges, I can see
where I'm going, kind of.
You know, use a compass and gothe right direction.
I think too often people buildtheir business, their airplane,
to carry more than it can carry.
(33:09):
They don't have enough fuel,they don't have enough cash,
they don't have enough runway totake off, they don't have
enough ability to do what isnecessary to run that business.
But since they got in theairplane and go, hey, I'm going
to fly somewhere today.
I don't know about thisairplane and I don't know about
that runway, but we're justgoing to gun it and go for it.
(33:31):
Right, that's a crash waitingto happen.
This is why businesses fail,because they didn't bother to do
the basics of how to do that.
And so I think that's theimportant thing is to understand
how your business operates andthen to make sure that it's
properly sized for what you wantto do and that you have the
(33:55):
cash to get where you want to go, so that you have the fuel to
be able to do that.
Now, when I go from LA to JFK,the reality is I'm going to be
off course 99% of the time.
I'm going to hit turbulence.
I might hit bad weather, like Ican get signals that tell me
(34:15):
bad weather's coming right.
I can talk to people and hearthere's turbulence.
I'm going to constantly coursecorrect and be able to reach my
destination, and so it's thesame thing in business.
You've got to be able.
And then what are the metrics totell you?
What are the signals that aretelling you you're on track?
(34:46):
For all of that, amazonactually does provide great data
for people.
I can go into someone's Amazondashboard.
All I want to do is I want youto sort one thing from negative
to positive.
I just want to know how muchprofit you made on everything
you sold.
And when you do that littleexercise, people's eyes light up
(35:08):
because they realize how muchmoney they're losing just on the
Amazon dashboard and they'relike I guess I should stop
selling this stuff.
Yes, yes, you should.
So I think that's a big part ofit is just having that clarity
of where you're going, whatyou're doing.
Do I have the fuel to place theorder in China or wherever
(35:28):
you're placing your order?
Do I have enough cash till mycash conversion cycle comes back
?
How many people you think geton Amazon and go?
I wonder what my cashconversion cycle is?
Nobody, hardly the ones whosurvive and do well.
Speaker 2 (35:46):
It's all.
I view that particular topic isalmost one that you need to
live before you fully understandit.
Where you place the order?
It sits in China, it sits on aboat, it goes to port, it takes
forever to get checked into anFBA warehouse and then you sell
it and then you wait your twoweeks and then it comes into
(36:06):
your pocket.
It's almost one that you couldread about, but until you
experience it it is hard tounderstand.
And once you go through it acouple of times you realize that
is a huge constraint on justcashflow in general, and I've
(36:27):
got a couple brands that I'vefour and five X'd in a
particular year and people wouldlook at that on the surface and
say you must feel rich, and Iwould say no, I've never felt
more cashflow poor.
And it's again like when I.
(36:50):
There is such a thing asgrowing too fast to where you
literally strangle yourself oncashflow or you put yourself in
a position where you'redesperate and need to get
outside capital to keep thewheels on the bus moving, and so
can you talk to that?
Have you worked with clientsthat have a business that
appears to be booming, that arestrangled by cashflow?
Speaker 3 (37:11):
That happens all the time.
Yeah, it usually happens when Ihave a new client, because one
of the first things we want todo is to change the cash
conversion cycle.
What I want is AR should beahead of AP, which means I want
(37:31):
somebody to order and send memoney on Amazon or my platform
and then I get the product fromwherever and deliver it and pay,
so I'm getting money before Iactually pay for it.
There are companies that havemassively grown super fast
because that's what they did.
(37:51):
They created a business modelwhere they sold things and got
the cash before they had to payfor them, and if you can do that
, god bless you.
I think that's harder on Amazon,but not necessarily.
You can find thoseopportunities maybe to be able
to do that, where you have thatkind of leeway to do that and
(38:17):
you just have to sit down andfigure it out.
So what I have said is abusiness that can do that, can
grow as fast as it wants, otherthan you need systems, processes
, procedures so that the machineworks well.
Businesses that are more likewhat you're talking about grow
in what I call a step fashion,and what that means is you go
(38:38):
out and you do something and youwait for the cash conversion
cycle.
Then you have a big chunk ofmoney, then you take the next
step.
Then you sit around and youwait for the entire cash
conversion cycle, then you takethe next step.
If you don't understand that,you will blow yourself up on
(38:59):
growth.
Growth is the number one, oneof the top reasons for
bankruptcy, and people don'trealize that.
Yeah, it doesn't matter e-com,any kind of business, it's the
same principles anywhere.
Speaker 2 (39:12):
Yeah, that what you said about receiving cash before
paying cash.
I'm a huge fan of WarrenBuffett and he talks about why
he loves the insurance industryso much is because it's one
industry where it's standard youget paid first and you deliver
uh the good, uh second.
And and I think there are likespecifically in custom products,
(39:37):
uh, there are in in dropshipping models.
There are opportunities herefor Amazon sellers, and one
thing I've found personally isthat, especially on products
that are made, a lot of timesthe makers like making, they
don't like selling, they don'tlike running an e-commerce
business, they like making andthey prefer to be in the
(39:59):
woodshop or whatever that may bedoing embroidery a lot more
than selling, and so there areopportunities there to approach
makers and look intoopportunities.
Speaker 3 (40:13):
And so is that more of an Etsy thing versus an
Amazon thing, or you know one ofit, so you can do both.
Speaker 2 (40:22):
I would say Etsy is definitely, if you're going into
custom products is definitelyone that you're going to want to
look at.
Amazon has a program calledAmazon Handmade that also does
custom products, and one of thethings that you need to be
careful of is fulfillment time.
You need to be able to turnaround that order in a maximum
(40:45):
of 14 days, or it's next toimpossible to sell on the
platform, and so when you youknow there are a lot of makers
that would be fine doingbusiness with you, but they
can't operate within a 14-dayturnaround window, and that's
okay.
But there are people that can,and that's something that I know
(41:08):
, I've done personally and I'vehad good success with.
So this interview is goinggreat and I feel like we could
sit here and talk for hoursabout this.
As a recovering CPA, it's goodto talk to one of my own, but
before we get to the fire round,I would like to ask you what
are some actionable steps, acouple actionable steps that
(41:31):
people listening to this cantake with them and implement
into their business.
Speaker 3 (41:37):
So, first off, do the math of your business.
Figure out what it takes todrive revenue, figure out what
it takes to drive profit, knowyour gross profit number and
know what your overhead is.
So that's the big thing.
I think a lot of people theyfocus just on top line revenue,
which is irrelevant.
Right, we say revenue is vanity.
(42:07):
Right, profit is sanity andcash flow is reality.
So understand what is thatgross profit number and then
understand what it's reallycosting you and how much you
have to run your business.
Tie all your marketing back toresults.
So if you're going to spend onmarketing, show me the results,
show me the sales, show me theconversion rate, because certain
things are going to work betterthan others.
(42:28):
This ad works better than thatad, this platform works better
than that platform.
And then understand your cashconversion cycle.
How long, every time I put adollar out, does it take me to
get my dollar back with profitand extra and a multiple?
Speaker 2 (42:47):
I like it.
I like it Very good.
Well, Rocky, before we end theinterview, we have four
questions we ask every guest atthe end of the episode.
It's called the fire round.
Speaker 3 (43:01):
Are you ready?
Sure, but I might havequestions.
Speaker 2 (43:04):
All right, that sounds great.
Uh, what is your favorite book?
Speaker 3 (43:07):
So this is why I have a question Like is that an
autobiography, a business book?
Uh, you know, a fun book toread?
Speaker 2 (43:18):
Uh, that's open for your interpretation.
Why don't we change this to thehighest impact book?
Speaker 3 (43:24):
The highest impact book.
Ooh, that's even going to be astruggle, but I'm going to go
with this.
The Road Less Stupid.
Okay, it's Keith Cunningham.
He's also a finance guy and thebook is actually about that.
He blew up his business becausehe got ahead of the cash
conversion cycle, got greedy,and then it's just a whole bunch
(43:46):
of questions to ask yourself onhow to improve your business.
Speaker 2 (43:51):
Very nice.
What are your hobbies?
Speaker 3 (43:55):
I like to read books.
Speaker 2 (43:57):
Very nice, very nice.
What is one thing you do notmiss about working for the man?
Speaker 3 (44:05):
I don't do well with stupid, and working for the man
was a whole lot of stupid inevery part of everything.
The problem when you work forthe man who happens to have a
really highly profitable product, is they do a whole lot of
stupid.
Speaker 2 (44:25):
Yeah, I've seen that firsthand.
And final question what do youthink sets apart successful
entrepreneurs from those whogive up, fail or never get
started?
Speaker 3 (44:39):
Well, so there's two parts to that question.
I mean, if you never get, getstarted, that's the biggest
thing.
Take because it's so hard to gofrom zero to one.
One to a hundred's easy.
Zero to one is really difficult, so that's one problem.
I think what determines successfrom failure is actually
sitting down and doing the thirdgrade math and understanding
(45:01):
the metrics of your business andhow your business works.
So this is the thing.
Most people go into businesswent into business to do what
they loved, and you kind oftalked about that with the
makers.
They love to make their stuff,they don't love to run a
business.
If you want to be successful inbusiness, you have to learn how
to run a business, and it's avery different skill set that
(45:25):
most people ignore.
Speaker 2 (45:27):
Absolutely.
I like it.
Rocky.
This has been an outstandingpodcast To our listeners.
Check out Profit Answer man.
I'm going to link to it in theshow notes, but it's an
outstanding podcast.
I've really enjoyed listeningto it.
And, rocky, if people areinterested in working with you,
what's the best way?
Speaker 3 (45:45):
So the website is ProfitComesFirstcom.
You can find all theinformation there and you can
find the podcast and you canfind the free giveaways that go
into depth of what we talkedabout today.
Speaker 2 (45:56):
Okay, very nice.
All right, rocky.
Well, thank you so much foryour time today and looking
forward to staying in touch.
Thanks for having me, david.
Welcome everyone to the Firing the man podcast, a
show for anyone who wants to betheir own boss.
If you sit in a cubicle everyday and know you are capable of
more, then join us.
This show will help you build abusiness and grow your passive
income streams in just a fewshort hours per day.
And now your hosts, serialentrepreneurs David Shomer and
(00:22):
Ken Wilson.
Speaker 2 (00:24):
Welcome back to the Firing the man podcast, the show
where we share the stories,strategies and systems behind
entrepreneurs who have takencontrol of their future and
fired the man.
Today, we're joined by a guestwho's all about flipping the
script on the traditionalaccounting formula in making
sure that entrepreneurs actuallyprofit from their hard work.
(00:46):
I'm talking about none otherthan Rocky Lalvani, the profit
answer man.
Rocky is a certified profitfirst professional who helps
business owners stop livingpaycheck to paycheck and start
putting profit first.
Literally, instead of the oldschool formula of sales minus
expenses equals profit, heteaches a much smarter approach
(01:11):
Sales minus profit equalsexpenses.
It's all about ensuring thatyou get paid first without
sacrificing your values, becausefor Rocky, people always come
before money.
His story is just as powerful ashis message.
As a son of immigrants whostarted over in their 40s, rocky
(01:32):
knows what it means to buildsuccess from the ground up, from
losing his mom at a young ageto becoming financially
independent and living the lifehe dreamed of.
Rocky's journey is nothingshort of inspiring.
Whether you're deep in theweeds of running your business
or just getting started, you'regoing to walk away from this
episode with real, actionablesteps to make your business more
(01:54):
profitable and your life moreintentional.
So let's dive in with Rocky andlearn how to profit.
First.
Rocky, welcome to the show.
Speaker 3 (02:04):
Thank you so much for having me, david, excited to be
here with you today.
Speaker 2 (02:08):
Absolutely, absolutely.
I'm looking forward to it aswell.
So to start things off, youtalk about flipping the
traditional accounting formulato put profit first.
Why do you think so manybusiness owners struggle with
profitability even when salesare strong?
Speaker 3 (02:33):
So A well, when they started their business, they
said they were going to beprofitable.
Maybe they did the math, maybethey didn't, which is part of
the problem.
So the first step is if youdidn't do the math on your
business when you began, how doyou know you're going to be
profitable?
You might've picked a businessor a model that wasn't, and I
think more often than not that'swhat happens.
(02:54):
People buy something and theygo, oh look, I can sell it on
Amazon for double or, back inthe day, ebay, and they thought
they were making money untilthey actually sat down and did
the math and realized they werenot making money, especially
when you compute your own time.
The second thing is there's awhole lot of emotions inside of
(03:17):
business and money.
So you start to make a littlemoney and you start to get a
little revenue.
And then what are we told?
Well, you have to reinvest it,right?
You're not told you need toremove it from your business.
Nobody ever says that to youexcept me.
You should be removing profitfrom your business.
That's the purpose of profit toremove it.
(03:40):
So I think they get stuck up inthat cycle of reinvesting and
most business owners paythemselves last, they pay
everybody else before they paythemselves, and that also
creates another problem.
So they might say, hey, David,I'm profitable.
You go wow, you had, what a 10%profit margin.
(04:01):
That's wonderful.
How much was your salary lastyear?
Oh well, that was my profit.
Oh, wonderful.
How much was your salary lastyear?
Oh well, that was my profit.
Oh oh, your profit was yoursalary.
You made 50 grand in profit,but when you were working for
the man, you were making 150.
Where is your profit now?
Yeah, these are all just thingsthat we see over time across
(04:25):
the board.
They don't appropriatelyallocate costs, they don't sit
down and figure out the businessmodel and they don't do the
math.
Speaker 2 (04:35):
You know, you brought up a really helpful step that a
lot of entrepreneurs forget tomake and I can tell you that
I've started plenty ofbusinesses where I have
forgotten this step and that islooking at the economics of a
sale and whether you know fromthe get go you are going to be
profitable.
And so for people that haven'tgone through that exercise, what
(04:56):
are some, some tips that youwould give them?
Speaker 3 (05:01):
The whole thing is a simple equation and when you put
everything into the equation,you can go backwards and
forwards through the business.
And what we do is we look atthat business with three
different drivers and each ofthe drivers has about five
leverage points.
(05:21):
So the first driver is how dowe drive sales?
Well, sales is pretty simplehow many people are interested
in your product?
What percentage of themactually buy the product?
So that's your marketing salesconversion cycle.
When they buy your product, howmuch is it?
So if something's $10 andsomebody buys one, well, you
(05:43):
know your revenue is $10.
If you sell 10 of them, now Iknow my revenue is $100.
This is not calculus, right?
It's basic, not smarter than afifth grader math.
Now the question is do they buyit once or do they buy it every
three months?
So now, if I've got 10 peoplebuying 10 items and they buy it
(06:05):
once a quarter, now I know Ihave 40 sales at 10 bucks a
piece.
So I know I made $400.
You can add all the zeros youwant.
It's irrelevant whether it's400, 400,000, 4 million, it's
just zeros at the end of thenumber.
The math is all the same.
So the first part is how do wedrive the revenue?
(06:27):
The second part is how do wedrive profit?
So that's the next bucket.
So when we look at drivingprofit, well, if I'm going to
sell that for $10, I had to payfor it, didn't I?
There was a cost of making it.
Let's just say it's $3.
So now, every time I sell one,my gross profit is $7.
(06:48):
But that's not all.
There is right.
You don't just sell it and payfor it and you're done.
There's a whole lot of overheadand there's sales and marketing
.
So how much did I pay for myadvertising, my salesperson, my
marketing, to drive that sale?
How much did I pay for overhead, your telephones, your software
(07:13):
, all that other stuff?
Maybe you've got admins who putup the posts in whatever social
media, all of that stuff.
What is it costing me to run mybusiness?
Let's just say, for argument'ssake, all of that stuff together
adds up to $6.
So we had $10 minus three, Ihave a gross profit of $7 and $6
(07:35):
to run my business.
Now I have a net profit of $1.
All right, that's not bad.
10%, not the end of the world.
The next thing is driving cashflow.
This is where nobody looks andthis is where it gets scary, and
this is why most businesses getin trouble.
I just sold a bunch of thesewidgets.
(07:57):
I'm not going to do the math,but let's just say my net profit
was $100,000.
But I now need to order morestuff and it's coming from China
and it's going to take sixmonths and they want a deposit
and then I got to pay for itbefore it gets on the ship.
That order was $200,000.
(08:17):
My $100,000 net profit went intoa minus $100,000 in cash flow.
Right, amazon's good.
They pay you immediately.
Not everybody pays youimmediately, depending on the
thing.
If I've got stuff in accountspayable or accounts receivable,
that means I turned into a bank.
(08:38):
So maybe there's $20,000 thatpeople still owe me.
Now I'm minus $120,000.
Nevermind, I had to orderinventory while I had inventory
on the shelf thousand dollarsthat people still owe me.
Now I'm minus one hundred andtwenty thousand dollars.
Never mind, I had to orderinventory while I had inventory
on the shelf, I still had thirtythousand of inventory on my
(08:59):
shelf.
Now I'm minus what?
One hundred and fifty thousanddollars, even though I was
profitable.
And so, understanding all thesenumbers, understanding how you
source goods, how you pay for it, what your terms are what your
gross profit margin is, how muchyou're selling on sales and
marketing.
All of that stuff needs to justbe calculated like that and
(09:21):
literally you can do it on abasic calculator with a plus
minus times button.
This isn't rocket science andwe teach all of this all the
time, so we teach it on thepodcast Profit Answer man.
We have a free giveaway.
We give away all this stuff,like you can.
Everything we do for ourclients, we teach and give away
(09:43):
because some people want to doit themselves and some people go
.
You just do that for me.
Speaker 2 (09:49):
Absolutely so.
The exercise that you outlined,where you're going through your
sales price and your unit costand all the costs of your
business, that is an exercisethat I do in my business and I
call it fail on paper and I havea criteria for pass fail.
Am I gonna move forward withthis product launch or not?
And I can tell you, had I gonethrough this exercise, there are
(10:13):
hundreds of products that Iwould not have launched in the
past, and so I'm curious whensomebody goes through this
example or through this exercise, where do you draw the line on?
This is something that is thatis a good idea and you should
move forward with, or this is abad idea, that margins are too
(10:35):
tight and it's going to fail?
Speaker 3 (10:39):
So, at minimum, at minimum, you want a 10% profit
margin, but if that's whereyou're starting, you're screwed,
because 10%.
You know, what I outlined foryou was a whole bunch of
different steps.
Let's just say each step wasoff by 1%.
(11:00):
Well, if each step was off by1% and you're 10% and there's 10
steps, you have the possibilityof making zero.
Why are you doing all this workfor nothing?
Like I want that number to beas high as possible, or we don't
(11:20):
do it.
But I was going to ask you aquestion, so A congratulations
on doing that.
When you talk to people abouthow you do that, do people go?
What Do they go?
Yeah, I do that too.
Like, is that a normalconversation?
Speaker 2 (11:37):
I don't think so.
I don't think I.
When I talk to people, it oftenseems like and I will say I'm a
retired accountant and so thisis in my nature to do, and I
think a lot of people would lookat it and say, oh, of course
David does it, he's a retiredaccountant.
However, it is not that hard.
(11:57):
You don't need an accountingdegree to do it, and I'll share
with you my pass fail rule.
I focus very hard on what's mylanded cost, so that's going to
be my unit cost, plus anypackaging, plus any labeling,
plus my transportation cost.
What does it cost to get thisitem in sellable form?
(12:19):
In the location that it'ssellable, say that's $10.
Location that it's sellable,say that's $10.
I need the average sales priceof products like that to be 4x
my landed cost, and so that's arule that I use.
Now, if I'm thinking aboutlaunching 10 products, I will
line all of them up next to eachother.
Sometimes it's 5x, sometimesit's 3x, but that's helpful.
(12:43):
That exercise is helpful in mespending my dollars on the
highest ROI items.
So that's the exercise that Igo through, and I am shocked at
the number of people that don'tgo through that exercise.
Speaker 3 (13:00):
And that's why I asked you the question, because
I have found very few people doit and it saves you a lot of
heartache and a lot of problem.
I like your Forex number.
It gives me a lot of margin forfailure throughout the system
and I don't think people realizethat.
And especially if you'reselling on Amazon, I mean, let's
just go work backwards.
(13:21):
Even if I'm buying something.
So it's a $10 item, your landedcost was 250.
When you say landed cost, isthat into amazon's warehouse or
your location to ship it toamazon into amazon's warehouse?
All right, so we're deliveredinto amazon for 250, so ten
dollars.
Hi, you know these numbersbetter than me.
(13:43):
What does amazon take?
Like 35 percent.
So I um, I would say it'sapproximating 40 to 50 percent
oh, all right, so if it goes infor 10, they take five.
That leaves you five dollars,right, and that includes the
rent and the storage and allthat stuff.
(14:05):
Correct, ok.
Does that include advertising?
Or do we need to do marketingon Amazon on top of that?
Sometimes that includesadvertising, all right.
So at this point you're makingtwo dollars and 50 cents.
Do you ever have to deal withshrinkage?
And by shrinkage I mean stuffdisappears, of course, of course
(14:26):
.
Speaker 2 (14:27):
So what percent disappears.
You know, I would say, like, onreturns, I would say between
five and seven percent onreturns, things going up,
missing, things being returnedand then not being able to be
put back in inventory, I wouldsay between five and and 7%.
Speaker 3 (14:44):
So now you're at another $0.70 out.
So now you're at $4.30.
Sorry for all the math people,but this is what you got to do.
So at this point, if you pay$2.50 for it, you've got $1.80
in profit, but we still havemore to go, by the way.
But we still have more to go,by the way, from the time you
(15:06):
buy something or pay for it howlong?
Till you actually get your cashback.
Speaker 2 (15:11):
My cash conversion cycle this year, which is a KPI
that I was heavily focused on,was 162 days.
Speaker 3 (15:19):
Whoa.
So you're a bank loaning outmoney for 162 days and we didn't
factor that in yet, did we?
We sure didn't.
So let's just say you had topay 10% to borrow that money,
which I don't think isunreasonable for somebody
starting out.
We're now down to $3.30.
(15:40):
That leaves you 80 cents to runyour business.
Now you still have to run yourbusiness, right?
I mean, you've got a phone,you've got a computer, maybe
you've got some people who haveto put the ads up on Amazon, the
VA.
I don't know how you do thatfor 80 cents and pay yourself,
(16:00):
unless you got ungodly amountsof volume.
Speaker 2 (16:04):
Yes, and this is something that we touched on a
little bit before we hit record.
But I would like to dive intokind of the economics of an
Amazon sale and where you seesuccessful e-commerce
entrepreneurs, because this veryexercise in what you're
outlining is something that I'vebeen living for eight years and
(16:26):
a lot of people look at that 4Xrule and they say, oh, that's
price gouging and that is aminimum requirement to keep your
head above water.
Speaker 3 (16:38):
The only price gouging is Amazon.
I don't disagree with that.
They're taking a lot of moneyfor that sale, yeah.
Speaker 2 (16:49):
Let's talk about this a little bit more.
I mean, for people that aregetting into e-commerce and I'm
sure there's a bunch of themlistening right now that's a
question that they have is do Igo the Amazon route, do I go the
Shopify route?
And you work with a lot ofe-commerce entrepreneurs, so
where do you see your moresuccessful clients placing
efforts on in terms of saleschannels?
Speaker 3 (17:11):
So if we're going to a channel that takes all our
money, we've got to have betterthan that margin you're talking
about, because otherwise it'sgoing to be extremely difficult.
Second of all, if we're goingto go through a platform that
takes all your money, I want todo anything and everything I can
(17:33):
to figure out how to convertthat client from that platform
to mine.
Because if you think about it,if I sold that same item on my
platform, what was the cost goes?
You may be 10% versus 50%.
So I just picked up ungodlyamounts of money.
(17:56):
So the question is how do Imake that conversion and how do
I do that Now, before we evenget there, right, somebody
else's branded product isprobably never going to have
those margins.
So you've got a private label.
You've got to find somethingdifferent, unique, like that's
(18:19):
all pre-planning that we don'teven need to get into.
I'm sure you'd cover that onother shows, but you've got to
have a competitive advantage.
So now the question is how dowe get them off of this platform
and onto ours?
Because that's the only waywe're going to make money at at
scale.
Or we've got eight to one orten to one type of margins
(18:42):
because we're selling a productthat has a very low cost of
creation but a high perceivedvalue, and that there are those
out there.
Um, usually it's when you'rethe inventor right, or in a
sense you're the inventor ofsomething like that.
I don't know, have you ever,have you been able to take a, a
(19:06):
regular item, and create thatkind of margin, and not so much?
Speaker 2 (19:11):
In other words, taking something and putting a
brand on it or changing it, oryou know, I would say at this
point in time I have probablydone between 2,500 and 3,000
product launches, and so I canidentify examples at the far end
of the bell curve that havegreat margins and are a success
(19:32):
story.
Now, if I look at the far endof the bell curve that have
great margins and are a successstory, now, if I look at the fat
part of that bell curve, veryinfrequently am I having rock
solid margins, and I think therehave been.
I've gotten better at that.
But one example or one instancethat I found, and if you think
(19:53):
back to economics class ofsupply and demand, what I found
on Amazon is and let's just usea $20 product where you go to
PPC, you will find a keywordthat converts at 10% and
(20:16):
magically the price will be adollar because the supply and
demand for that keyword pushesit towards breakeven.
And I have experienced that andI have seen it with a lot of
other e-commerce entrepreneurswho have great margins or decent
margins before PPC, but whenthey look at the supply and
demand of keywords after PPC,they are approximate breakeven
(20:41):
and that's a tough situation tobe in.
And so I've seen that withFacebook ads, google ads and
Amazon, ppc in particular.
On PPC in particular, and itseems like there are other.
There are like influenceroutreach is one where it takes
some legwork, takes somerelationships.
There is not a competitivemarketplace for supply and
(21:03):
demand of influencers as thereis for keywords, and so the
keyword market is very efficientand I think it pushes you
towards breakeven.
What do you think about that?
Speaker 3 (21:15):
Well, whenever you have something with a fat margin
, you're going to attract peoplewho are going to come after
those fat margins.
So every time you think you'vemade it, you need another
product, because that's what'sgoing to happen.
(21:35):
Influencer marketing I haveseen nothing but headaches with
this, and the headaches are someof these influencers are nutty
and you're putting yourreputation on them.
Influencers are nutty andyou're putting your reputation
on them.
(21:55):
The influencers fight eachother behind the scenes.
So if your influencer ispromoting your product and
another influencer who doesn'tlike that influencer is funny
gets that one, your product getscaught in the crossfire.
Yeah Right, there's all theseother things going on behind the
scenes.
It's it's just work, it's allyou have to play the game.
(22:22):
You have to be nimble On top ofthat and we haven't even
touched on it.
The other person you have tofight is the man, amazon,
because somebody who's yourcompetitor might put a case
against you and it's not eventrue and you can prove it.
(22:45):
Good luck, because you know, ata tech company, nobody answers
the phone because, you know, ata tech company, nobody answers
the phone.
Speaker 2 (22:59):
Yeah, yeah, no, you're absolutely right, and
that's something that you weretalking about.
You know, a message to Amazonsellers is, you know, try to
push them over to your ownplatform, and it's something
that I run into.
You know, there's a saying thatI really like, and people who
have listened to the show haveheard me say this a hundred
times A clean conscience is acomfortable pillow, and when I'm
running my Amazon brands, I amvery conscious of following
(23:21):
terms of service.
There's certainly sellers thataren't, but I am using the
income from these brands tosupport my family and I want to
do everything in my power to bea good Amazon seller, because
there are a lot of ways to getyour account turned off, even if
you are making best effort tooperate within the terms of
(23:42):
service, and so I think that'ssomething that people have a
tough time, and I'll use productinserts as an example.
Product inserts with QR codethat take people to your website
against the terms of service.
Is it an effective way ofpushing traffic towards your
website?
Certainly.
However, it presents this oddscenario of well, what do I do?
(24:08):
I know what's best for my brand, but also I want to operate
within the rules, and so I'mcurious as you work with
different entrepreneurs, haveyou found any effective
strategies to push traffictowards a website that are by
the book?
Speaker 3 (24:27):
That's a good question.
That was the question I wasgoing to ask you.
Do we have to follow the book?
So, depending on the product,online instruction manual, that
that kind of gets them into yourecosystem?
(24:49):
Ecosystem?
Um, I don't know, how do youcreate a hook that makes the
person so the?
Really what you want to do isbuild a brand and build.
So you've got all thesedifferent products.
How do we build a brand aroundall these different products?
So, instead of going to,they're looking for the brand
(25:11):
and somehow doing it.
From that standpoint, I thinkis big.
What other ways could we getthem off?
Yeah, amazon's got so manyrules and it's difficult to be
able to do that without breakingthe rule.
Sure, have you found ways tokind of get around it.
Speaker 2 (25:35):
And if you don't want to say that's totally
understandable, because no, Iyou know pricing is one that is
not against terms of service.
I do not believe everyonelistening check into this, but
it can impact your results onthe algorithm.
So if you have something listedon Amazon for $19 and you have
(25:57):
it on your website for $16,amazon may see that and punish
the algorithm.
Speaker 3 (26:04):
They will punish you, they will, and that honestly,
that technically, should beagainst the law On their side.
Speaker 2 (26:16):
If you look at some of the lawsuits against Amazon,
that's often something that getscited.
You're handcuffing businessowners on pricing on their own
website, and so I have not foundthat to be an effective
strategy.
And so I have not found that tobe an effective strategy.
And so now I would say I amscratching the surface on
(26:37):
influencer marketing andstepping up our game on social
media, and then I make adecision on whether I want to
push them to the website or toAmazon, and that's something I
also measure.
You know conversion rates muchhigher on Amazon and so, but the
fees are also higher, and soit's kind of a delicate
(26:59):
balancing act and it's somethingthat you're starting to see
some competitive forces.
You know Walmart's coming onthe scene, timmy is coming on
the scene, and I think that isgood for third-party sellers.
I think competition generallyis good for third-party sellers
because it has not been, youknow, for a long time.
(27:21):
Amazon has kind of been the onlyshow in town, and and so I've
talked about some of thepositives I'll talk about, or
I've talked about the negatives.
You know, on the positive sideof things, if it's a mall, it's
a huge mall.
There's more people coming tothat mall than any other mall in
America and they have abuilt-in trust established with
(27:41):
their customer, where thecustomer knows I'm going to get
this item in two days.
If I'm a prime member, I've gotfree returns for 30 days, and
that trust has taken a lot oftime and investment to build,
and when you start a website,you don't start with that trust
on day one.
It's something you need tobuild, and so there's definitely
pros and cons and, as I kind oflook at my overall e-commerce
(28:06):
strategy, I view Amazon as beinga component of a brand, but not
the lifeblood of a brand.
Speaker 3 (28:14):
You should never.
Don't build a business onsomeone else's platform, and I
don't care if it's Amazon, itcould be Facebook.
Don't build a business onFacebook because if Facebook
cuts you off, you're done Right.
And that's true of any otherplatform, and it doesn't matter
whether they're good, bad orindifferent, it's just if you're
(28:38):
building on someone else's realestate, they own it and you can
find yourself in a heartbeat,cut out.
So how do you be able to dothat?
At the same point, well, thequestion is how much?
And again you go back totraditional marketing channels,
(29:02):
putting stuff into stores.
But again, that's not easyeither and that takes a ton of
work and that takes moreoverhead.
So there's a million otherissues you kind of have to deal
with.
Speaker 2 (29:14):
Yeah, let's circle back on mindset and mindset of
entrepreneurs when they areapproaching big business
decisions like this.
What are some mindset shifts?
And and, and, if you can getinto the flipping the accounting
equation on its head.
Speaker 3 (29:33):
So probably, at first , the whole principle of it is
sorry.
Sorry because you're anaccountant, right?
Accountants say sales minusexpenses equals profit, which
means your profit's a leftover,it's an after the fact,
something that occurs based oneverything else, whereas profit
first says it's sales minusprofit equals expenses.
(29:57):
So now you're taking yourprofit first and you have a
leftover and you're going tohave to figure out how to run
your business on those expenses,and if you can't, well then you
don't have a profitablebusiness, so don't do it.
And so it's just flipping theway you look at that equation
(30:17):
and it's built on an age oldprinciple of pay yourself first
and that's all it is.
Principle of pay yourself firstand that's all it is.
Just pay yourself first, and ifyou can't, your business is
broken.
This isn't about greed, it'snot about anything else, it's
just like, hey, you should payyourself first.
Speaker 2 (30:35):
Yeah, for the people that go through this exercise
where they are looking at, okay,I'm going to do the profit
first equation, this is what I'mgoing to do next month, and
they notice that they do havetoo many expenses or the
economics of it doesn't work.
What is your recommendation?
And give up and start overisn't an option, because I think
(31:01):
this is something that you know.
I've got a business that I'vehad for eight years.
I've had great years, I've hadbust years and I've had times
where I look at that equationand it's not favorable for
paying myself first.
And so what would you recommend?
Somebody you know, if theyrecognize this is a problem,
(31:21):
what would you recommend thatthey do?
Speaker 3 (31:24):
Pivot, so it's not necessarily starting over.
The question is what needs tochange?
And so when we look at this,the first question is let's do
kind of an analogy.
Running a business is likeflying an airplane, correct?
In the sense that well, let'stalk about it.
(31:46):
When you get in the airplaneand the pilot's there, the pilot
tells you where we're going,correct?
So if we're in LA, he says, hey, we're going over here, we're
going to land at JFK, right.
And so when he goes to take theplane off, you know where your
destination is.
We talked about that.
(32:07):
When you begin sellingsomething, you did the math to
know where your destination was,did you not?
Hopefully there's differentkinds of airplanes Small
business, it might be a singleengine, jet, or not even jet,
but a prop plane versus a 747.
When you're a 747, you're a bigbusiness.
(32:27):
You go up in that cockpit.
There's a million dials,there's a lot of things to take
care of, you're carrying a lotof passengers, employees, along
the way, right?
You need a ton of fuel cash tobe able to get somewhere.
You and I, we run smallbusinesses.
Maybe there's one engine, twoengines.
(32:48):
We don't have that many gauges.
If the sun is shining, I don'teven need gauges, I can see
where I'm going, kind of.
You know, use a compass and gothe right direction.
I think too often people buildtheir business, their airplane,
to carry more than it can carry.
(33:09):
They don't have enough fuel,they don't have enough cash,
they don't have enough runway totake off, they don't have
enough ability to do what isnecessary to run that business.
But since they got in theairplane and go, hey, I'm going
to fly somewhere today.
I don't know about thisairplane and I don't know about
that runway, but we're justgoing to gun it and go for it.
(33:31):
Right, that's a crash waitingto happen.
This is why businesses fail,because they didn't bother to do
the basics of how to do that.
And so I think that's theimportant thing is to understand
how your business operates andthen to make sure that it's
properly sized for what you wantto do and that you have the
(33:55):
cash to get where you want to go, so that you have the fuel to
be able to do that.
Now, when I go from LA to JFK,the reality is I'm going to be
off course 99% of the time.
I'm going to hit turbulence.
I might hit bad weather, like Ican get signals that tell me
(34:15):
bad weather's coming right.
I can talk to people and hearthere's turbulence.
I'm going to constantly coursecorrect and be able to reach my
destination, and so it's thesame thing in business.
You've got to be able.
And then what are the metrics totell you?
What are the signals that aretelling you you're on track?
(34:46):
For all of that, amazonactually does provide great data
for people.
I can go into someone's Amazondashboard.
All I want to do is I want youto sort one thing from negative
to positive.
I just want to know how muchprofit you made on everything
you sold.
And when you do that littleexercise, people's eyes light up
(35:08):
because they realize how muchmoney they're losing just on the
Amazon dashboard and they'relike I guess I should stop
selling this stuff.
Yes, yes, you should.
So I think that's a big part ofit is just having that clarity
of where you're going, whatyou're doing.
Do I have the fuel to place theorder in China or wherever
(35:28):
you're placing your order?
Do I have enough cash till mycash conversion cycle comes back
?
How many people you think geton Amazon and go?
I wonder what my cashconversion cycle is?
Nobody, hardly the ones whosurvive and do well.
Speaker 2 (35:46):
It's all.
I view that particular topic isalmost one that you need to
live before you fully understandit.
Where you place the order?
It sits in China, it sits on aboat, it goes to port, it takes
forever to get checked into anFBA warehouse and then you sell
it and then you wait your twoweeks and then it comes into
(36:06):
your pocket.
It's almost one that you couldread about, but until you
experience it it is hard tounderstand.
And once you go through it acouple of times you realize that
is a huge constraint on justcashflow in general, and I've
(36:27):
got a couple brands that I'vefour and five X'd in a
particular year and people wouldlook at that on the surface and
say you must feel rich, and Iwould say no, I've never felt
more cashflow poor.
And it's again like when I.
(36:50):
There is such a thing asgrowing too fast to where you
literally strangle yourself oncashflow or you put yourself in
a position where you'redesperate and need to get
outside capital to keep thewheels on the bus moving, and so
can you talk to that?
Have you worked with clientsthat have a business that
appears to be booming, that arestrangled by cashflow?
Speaker 3 (37:11):
That happens all the time.
Yeah, it usually happens when Ihave a new client, because one
of the first things we want todo is to change the cash
conversion cycle.
What I want is AR should beahead of AP, which means I want
(37:31):
somebody to order and send memoney on Amazon or my platform
and then I get the product fromwherever and deliver it and pay,
so I'm getting money before Iactually pay for it.
There are companies that havemassively grown super fast
because that's what they did.
(37:51):
They created a business modelwhere they sold things and got
the cash before they had to payfor them, and if you can do that
, god bless you.
I think that's harder on Amazon,but not necessarily.
You can find thoseopportunities maybe to be able
to do that, where you have thatkind of leeway to do that and
(38:17):
you just have to sit down andfigure it out.
So what I have said is abusiness that can do that, can
grow as fast as it wants, otherthan you need systems, processes
, procedures so that the machineworks well.
Businesses that are more likewhat you're talking about grow
in what I call a step fashion,and what that means is you go
(38:38):
out and you do something and youwait for the cash conversion
cycle.
Then you have a big chunk ofmoney, then you take the next
step.
Then you sit around and youwait for the entire cash
conversion cycle, then you takethe next step.
If you don't understand that,you will blow yourself up on
(38:59):
growth.
Growth is the number one, oneof the top reasons for
bankruptcy, and people don'trealize that.
Yeah, it doesn't matter e-com,any kind of business, it's the
same principles anywhere.
Speaker 2 (39:12):
Yeah, that what you said about receiving cash before
paying cash.
I'm a huge fan of WarrenBuffett and he talks about why
he loves the insurance industryso much is because it's one
industry where it's standard youget paid first and you deliver
uh the good, uh second.
And and I think there are likespecifically in custom products,
(39:37):
uh, there are in in dropshipping models.
There are opportunities herefor Amazon sellers, and one
thing I've found personally isthat, especially on products
that are made, a lot of timesthe makers like making, they
don't like selling, they don'tlike running an e-commerce
business, they like making andthey prefer to be in the
(39:59):
woodshop or whatever that may bedoing embroidery a lot more
than selling, and so there areopportunities there to approach
makers and look intoopportunities.
Speaker 3 (40:13):
And so is that more of an Etsy thing versus an
Amazon thing, or you know one ofit, so you can do both.
Speaker 2 (40:22):
I would say Etsy is definitely, if you're going into
custom products is definitelyone that you're going to want to
look at.
Amazon has a program calledAmazon Handmade that also does
custom products, and one of thethings that you need to be
careful of is fulfillment time.
You need to be able to turnaround that order in a maximum
(40:45):
of 14 days, or it's next toimpossible to sell on the
platform, and so when you youknow there are a lot of makers
that would be fine doingbusiness with you, but they
can't operate within a 14-dayturnaround window, and that's
okay.
But there are people that can,and that's something that I know
(41:08):
, I've done personally and I'vehad good success with.
So this interview is goinggreat and I feel like we could
sit here and talk for hoursabout this.
As a recovering CPA, it's goodto talk to one of my own, but
before we get to the fire round,I would like to ask you what
are some actionable steps, acouple actionable steps that
(41:31):
people listening to this cantake with them and implement
into their business.
Speaker 3 (41:37):
So, first off, do the math of your business.
Figure out what it takes todrive revenue, figure out what
it takes to drive profit, knowyour gross profit number and
know what your overhead is.
So that's the big thing.
I think a lot of people theyfocus just on top line revenue,
which is irrelevant.
Right, we say revenue is vanity.
(42:07):
Right, profit is sanity andcash flow is reality.
So understand what is thatgross profit number and then
understand what it's reallycosting you and how much you
have to run your business.
Tie all your marketing back toresults.
So if you're going to spend onmarketing, show me the results,
show me the sales, show me theconversion rate, because certain
things are going to work betterthan others.
(42:28):
This ad works better than thatad, this platform works better
than that platform.
And then understand your cashconversion cycle.
How long, every time I put adollar out, does it take me to
get my dollar back with profitand extra and a multiple?
Speaker 2 (42:47):
I like it.
I like it Very good.
Well, Rocky, before we end theinterview, we have four
questions we ask every guest atthe end of the episode.
It's called the fire round.
Speaker 3 (43:01):
Are you ready?
Sure, but I might havequestions.
Speaker 2 (43:04):
All right, that sounds great.
Uh, what is your favorite book?
Speaker 3 (43:07):
So this is why I have a question Like is that an
autobiography, a business book?
Uh, you know, a fun book toread?
Speaker 2 (43:18):
Uh, that's open for your interpretation.
Why don't we change this to thehighest impact book?
Speaker 3 (43:24):
The highest impact book.
Ooh, that's even going to be astruggle, but I'm going to go
with this.
The Road Less Stupid.
Okay, it's Keith Cunningham.
He's also a finance guy and thebook is actually about that.
He blew up his business becausehe got ahead of the cash
conversion cycle, got greedy,and then it's just a whole bunch
(43:46):
of questions to ask yourself onhow to improve your business.
Speaker 2 (43:51):
Very nice.
What are your hobbies?
Speaker 3 (43:55):
I like to read books.
Speaker 2 (43:57):
Very nice, very nice.
What is one thing you do notmiss about working for the man?
Speaker 3 (44:05):
I don't do well with stupid, and working for the man
was a whole lot of stupid inevery part of everything.
The problem when you work forthe man who happens to have a
really highly profitable product, is they do a whole lot of
stupid.
Speaker 2 (44:25):
Yeah, I've seen that firsthand.
And final question what do youthink sets apart successful
entrepreneurs from those whogive up, fail or never get
started?
Speaker 3 (44:39):
Well, so there's two parts to that question.
I mean, if you never get, getstarted, that's the biggest
thing.
Take because it's so hard to gofrom zero to one.
One to a hundred's easy.
Zero to one is really difficult, so that's one problem.
I think what determines successfrom failure is actually
sitting down and doing the thirdgrade math and understanding
(45:01):
the metrics of your business andhow your business works.
So this is the thing.
Most people go into businesswent into business to do what
they loved, and you kind oftalked about that with the
makers.
They love to make their stuff,they don't love to run a
business.
If you want to be successful inbusiness, you have to learn how
to run a business, and it's avery different skill set that
(45:25):
most people ignore.
Speaker 2 (45:27):
Absolutely.
I like it.
Rocky.
This has been an outstandingpodcast To our listeners.
Check out Profit Answer man.
I'm going to link to it in theshow notes, but it's an
outstanding podcast.
I've really enjoyed listeningto it.
And, rocky, if people areinterested in working with you,
what's the best way?
Speaker 3 (45:45):
So the website is ProfitComesFirstcom.
You can find all theinformation there and you can
find the podcast and you canfind the free giveaways that go
into depth of what we talkedabout today.
Speaker 2 (45:56):
Okay, very nice.
All right, rocky.
Well, thank you so much foryour time today and looking
forward to staying in touch.
Thanks for having me, david.
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