7 Business Metrics to Master — Step-by-Step Guide & Transcript

[00:02] will get rich. Whether you're broke or you make money but you know you should be making more, this video will fix both. I learned seven principles of success that took me from dead broke at 24 to being a multi-millionaire

[00:14] by 28, four years. And these principles aren't just some generic advice, we'll leave that for the other people. Each one has a number that's going to make it crystal clear on how you act on each and every one. Starting with principle

[00:27] number one, know what you're building. The idea is this, can you get a business that can generate profits without you? It's very simple, if you vanish, poof, tomorrow, would the whole thing collapse? Would it slowly decay? My rule

[00:43] is I always build a business so I can sell it because whether I do or don't, a company I could sell is a great company to run. So, what metric should you you're building is the right thing? It's called enterprise value or EV, and

[00:58] here's how you calculate it. The first thing is we have to take your yearly profits. Then, you multiply it by the industry multiple. This is the average amount of money that buyers, if you build something that people want to buy,

[01:13] build something that people want to buy, will pay on the profit. The less risk the business has, the higher the profit, the better the multiple. So, it's called durable revenue. So, for example, let's use real simple numbers. If you're

[01:26] use real simple numbers. If you're making 500,000 in profit each year, okay? You have a business that does 1.5 million and it's 30% profit, that's a then look at the industry average, let's call it an agency and it's got a 3x

[01:40] multiple, then that means your business to a buyer could be worth 1.5 million dollars. That's your enterprise value. That's why when you're making decisions think, can I invest some of that profit back into the business to increase my

[01:55] enterprise value because you can take that from 1.5 to 3 million fairly quickly. So, now we know what we're building and how to build it, but what makes a business more valuable than another? Principle number two, keep what

[02:07] you make. This is what separates a 2x business from a 10x business. It's not what you make, it's what you keep. Every dollar that you keep after you pay all valuable. Some people have big revenue and tiny little margins and to me that

[02:23] revenue is just vanity, right? You can hit 10 million in revenue and still wake up broke. Those people show up in my DMs every day because they don't know this. every dollar that you're making, then you're just flying blind in business and

[02:37] you're not creating wealth, you're not being efficient. The metric that aligns the most with how much you keep is gross margin. So, essentially, we have margin. So, essentially, we have revenue. How much money do you make per

[02:50] month? Then you got to subtract the cost, okay? to deliver. Everything that came with the item or the services. How much did that make, okay?

[03:02] And if you do that, if you have revenue minus cost to deliver, that equals gross profit, which is different than profit. Look, profit is typically your revenue

[03:14] minus all your expenses. This is gross profit on just the thing sold. So, to get our gross margin number, what we got to do is take our gross profit, stay with me, we're going to have some fun, divided by our revenue. How much

[03:30] money did I make that month, okay? Times 100 because it's a math equation and 100 because it's a math equation and that equals our gross margin. So, for example, if my revenue for the month is 50k, okay? And my cost to deliver was

[03:46] only 10k, that means my gross profit, pretty that means my gross profit, pretty awesome, equals $40,000. Cool. Now, I take the 40k and then I divide it by my revenue,

[03:59] which is 50k, and then I multiply by that 100, so I get the number 80% gross margin. Your accountant has probably never been able to explain this to you, and you're like, "I don't get it." My rule is gross

[04:14] margin for any business I'm involved in never falls below 70%. Now, if you own a restaurant, you're like, "Well, that's just freaking I don't get it." Because average food cost in a restaurant, the margin is about 23%.

[04:26] It's different for every business, but that is where I like to stay because the higher the gross margin when I'm building a business, the more profit I which means the business is more valuable to increase my enterprise

[04:38] value. So, knowing your margins is step one, but understanding all the principles to apply it to your business, that's a completely different thing. So, if you want my internal scale your business workbook with the exact steps

[04:51] through for free, just DM me the word YouTube workbook on Instagram, and I'll send it right over. So, having large margins is awesomesauce, but the large margins won't feel very good if you can't maintain them, which brings us to

[05:04] three, you got to plug the holes in the bucket before you fill it. If you're losing clients faster than you can bring them in, there's a point where you will just be banging your head against the ceiling. See, most entrepreneurs that

[05:19] a marketing problem. I got to go run more ads. Get more people to show up." Wrong move. If you just pour water into a bucket with massive holes in it, you can't pour enough water fast enough to fill that bucket up. And that is what

[05:33] people often do. How about you keep the customers you have or sell more to them you know it's seven to eight times cheaper to sell something to an existing client than it is to go find a new one? So, where should you put your effort in

[05:48] at what level? The metric that helps you plug the holes in that bucket is called churn rate. So, here's how we calculate it. Super simple. So, first is we need the clients that we've lost that month, okay? Clients lost. How many this month

[06:03] did you lose, okay? In the month. Then we divide that number by the total amount of clients we had at the beginning of the month, not the end of to make that a percentage, like always, we multiply it by 100 and that equals

[06:17] your churn rate. So, for example, the beginning of the month, you started with 100. That would mean, times 100, you would have a 3%

[06:32] churn rate. Most businesses should be at 3% monthly churn, okay? Now, obviously, this. You have a restaurant, you have an agency, you have a retail store, it's a look at the transaction volume, you can look at the average purchase rate, you

[06:48] can figure out through the data what yours is. And honestly, just look at like how often are people buying from you again and again. If you never lose a okay? And on the top side, you have how

[07:00] side, you have how many customers you've lost. If you grabbed all those people underneath that line and you put it on top of the customers you currently have, would be if you never lost a customer. For most businesses, that could be two

[07:14] how many clients are leaving. The next thing we need to know is what are those clients actually worth. Think about this. The client you already have is worth way more than the one you're chasing. Most founders are out

[07:27] trying to chase new customers and not realizing the ones that they have now could be worth a lot of money if they knew what that was worth. I'm a big fan of always growing what you've got before you go chase what you don't. And the

[07:40] metric that tracks what each one of your clients are worth is lifetime value or LTV. Here's how we calculate it. It's a super cool, simple formula that nobody teaches. So, what you do is you take the average revenue

[07:54] per client per month, okay? How much is that number? that number? And then you divide it by the monthly churn percent, okay? And that will give you

[08:09] percent, okay? And that will give you your life time value, okay? worth? I am. I'm curious for you. Let's say for example, a customer pays you 100 bucks a month, okay? Divided by, let's say you have a

[08:23] 2% monthly churn, 0.02, then that means your customer is worth $5,000. You see why this gets exciting? Because instead of losing customers and you keep them, they get worth more and

[08:38] more and more. And when you do that, guess what goes up? Enterprise value. I know, it all stacks together, okay? The important note is that churn is the drag you get paid every month is important, but most people don't realize that if

[08:52] double the value of their customer with no extra effort. Same price, twice the from your existing clients, but you still have to grow the business. And every time you do that, it does cost you something. Principle number five, know

[09:07] your spend. Here's the thing, it doesn't matter if you're a professional speaker, a coach, a restaurant, a retail store, sell stuff online. Before you ever get paid, a client costs you money, okay? Think about it. From an ads point of

[09:21] commission, maybe you had to do a promotion, a marketing thing, maybe you had to pay to go on a radio station. There's costs that goes in to making the market aware of you before somebody ever gives you money. And most founders and

[09:34] business owners never tally up what a single yes from a client actually costs. The richest operators I know know this number cold. Broke ones, they guess. And if you can't price the yes, you can't price growth. The metric that

[09:49] tracks how much a client costs is called the customer acquisition cost or your CAC. So first, you have to take everything that you spend to get a customer and know what that means. So that is your

[10:01] to get a client. I'm talking the ads, the sales commission, the software that you had to you spent that month. Then you divide how many new clients

[10:16] you added that month. Okay? Not leads, not trials, actually paying clients that gave you money. And that will give you your CAC, your cost to acquire a customer. Let's say for example, you spent $10,000

[10:32] in expenses that month to acquire customers, and you got you would divide the number by 20, 20 new customers, that means every one of them cost you $500.

[10:44] So your CAC to acquire a customer is $500. Isn't this cool? Now, you can business. So somebody comes to you and they say, "Hey, I can get you new that's cool because right now I'm paying 500. If you can get it for 100, that's a

[10:59] Right? But if somebody came to you and said, "Hey, I can get you a customer for $1,000." You might go, "How about no." So here's a pro tip. There's another metric called the CAC payback period, meaning how much do you spend and how

[11:13] quick can you get it back? So let's say a customer pays me $100 a month, and my cost to acquire a customer is $100 a month. That means that I can grow unlimited with a 30-day credit card to pay back. See what I'm saying?

[11:27] But if I have to spend $500 to get a customer, and I only make that money customer, and I only make that money back after 6 months, the faster I grow, what you hear is the sound of cash flying out of your business cuz you got

[11:40] to finance that growth. Even if the customer's worth $5,000 to you, you want to make sure that the speed that you can get back the cash that you spent to possible. So, that's why a lot of

[11:53] get you to increase your average order value. They try to get you to pre-buy something before you use it because that cash finances the acquisition cost. Cuz if not, you have to finance other people's value that you're delivering

[12:08] with your business, and that's just not a fun place to be. Okay, so now you know That's awesome. But what if you're trying to grow and spend money to you? Which brings us to principle number six, tighten your funnels.

[12:23] Every week new people know about you. They find content. They talk to somebody. They're referred to you, and they walk into your business, your website, and they want to buy from you. They raise their hand, and yet somehow

[12:36] wanted to give you money. They weren't able to do that. It happens in my businesses. There's broken links. People text me them. It's just a normal that most founders don't even see it happening. So, the metric that tracks

[12:50] how many clients that come through your funnel and drop is your conversion rate. So, here's how we calculate. First, you take your funnel, and you break it into all the separate steps that are involved. Think leads, qualified,

[13:04] booked, showed, and closed. That's usually the big ones, right? Each stage is a new yes. If the person doesn't go from stage one to stage two, it's a no. is the total amount of percent of people

[13:17] that started and finished by giving you money. So, at each stage it says yes, those are called survivors. So, we want to count at each stage how many people survived that question. So, if you have 100 leads and then 40 people qualify and

[13:30] then 10 people book, eight people show, 5% close, that means your overall conversion rate is 5%. So, now you got your funnels figured out and you look and you go, "Hmm, where should I focus my time?" You need to figure out which

[13:43] step is broken and then go attack that step. So, this allows you to know where you can improve the business the fastest. And then next we have principle number seven, know how long you can go. Every month that goes by where you don't

[13:57] of pocket. It's why when people start companies, they usually empty out their savings account. But at certain point, you're going to run out of energy and time to grow this business if you're not making any profit. You need to know how

[14:10] many tries, how many months do you have ahead of you so that you can calibrate each decision. Experienced founders, the best, know exactly how many months they have left. Your P&L, your profit and loss statement, it's an autopsy after

[14:22] the fact, not a diagnosis. Your business could be done in 30 days cuz you didn't even know. The metric until it has to shut its door is called your burn rate and runway. Okay, so the

[14:35] what is our burn rate. So, essentially you take the cash out, which is a negative number because it's gone. Then you add the cash that's coming in, this is your sales, any kind of revenue, that's really important, okay, and

[14:48] that's a positive number. And then whatever is left over, that may be a your burn. And for example, if you're spending 40 grand, okay, and the money coming in is only 20k,

[15:01] okay, then that means that your burn per month is negative $20,000. So, that means every month that goes by, you lose $20,000. So, now we need to know how much cash is in the bank, cash in bank,

[15:16] in bank, right? Minus your burn, okay? Equals how many months your runway, okay? Essentially, how many months can you continue this way? Okay? In the business world, I call this

[15:31] default dead. How many months before your default dead? Now, if you're making more than you're spending, game on. But, what happens is often times we make investments, we make bets, and we can make that ratio get flipped again, even

[15:45] we're spending. So, for example, if I start the business and I somehow get $100,000 together, and I'm burning every month 20K, then that means I have 5 months of runway. 5

[15:58] months until I'm at zero. 5 months until I'm default dead. At minimum, you obviously want to make that number as far as possible into the future. If you're 2 to 3 months away, take massive, crazy, high-volume action, because one

[16:11] bad month can actually make this number a lot closer than you think. And one way I do this so that I'm never surprised is I do a daily cash report. That means every day I get how much cash came in, how much cash went out, and I'm paying

[16:23] attention to it so I can create a rhythm or a pulse on my cash. follow them and you focus on them, you will increase the value of your business more than anything else. Now, you know what levers to pull to improve it. What

[16:38] I want to ask you below in the comments is let me know out of those seven, which one did you feel you need to go calculate and go come back and calculate answer, but I need to know that you did the work. The truth is the winners

[16:51] aren't the smartest people in the world that are like so genius level IQ. numbers, they know what to measure, and they know how to fix them. And remember, if you want my whole workbook on how to scale your business that includes this

[17:03] and a bunch of other stuff, just go find me on Instagram and DM me the word over. And if you want to learn how I would go from zero to a million dollars if I was starting from scratch, click here and I'll see you on the other side.