Profit Doctor: When Revenue Grows but Profit Doesn't

[00:00:01] You're listening to the HR Mixtape, a podcast for leaders who want to understand people, strengthen culture, and navigate change with clarity. Today's conversation starts now.

[00:00:15] Joining me today is Ben Hanson, CEO at Profit Doctor. Ben helps CEOs diagnose profit problems fast and build healthier, more sustainable businesses that can invest in their people. Ben, thank you so much for jumping on the podcast with me today. Ben Hanson Oh, happy to be here, Shari Simpson. Real exciting for it. So we're going to talk about an interesting topic today called profititis.

[00:00:44] So I'd love if you could start by helping define that term for our audience. Ben Hanson So think profititis, like tendonitis, if you will, which might mean sick profitability. The way we look at it is companies that have strong or solid top line revenue sales, but weak, declining, sick, bottom line net profitability.

[00:01:09] Ben Hanson Love that. Super simple, easy for us to understand. And you bring a really interesting perspective. So you built an eight-figure staffing firm. When did you kind of first realize that growth, and I'm using that term with air quotes here, can hide a profit problem?

[00:01:25] Ben Hanson Sure. You know, in fact, in many cases, it is growth that is hiding your profit problem. Or maybe more specifically, so many people, business owners, that is, are so focused on growth, customer acquisition, getting more revenue, that sometimes they set aside profitability, margin, contribution margin.

[00:01:46] Ben Hanson We'll just call them efficiency and profitability type metrics. And in fact, often it's that push for rapid growth or just focus, you know, 150% on growth that results in maybe too little focus around profitability. Ben Hanson What are some of the signs that you've seen leaders ignore until it's really, really painful in this area?

[00:02:09] Ben Hanson Yeah. You know, some big ones. I mean, the most obvious is looking at their P&Ls, if you will, on a monthly basis, and being able to chart how revenue and profitability may be diverging. That is sort of the biggest and most obvious one. Also, just keeping track of net profitability, if you will, as a total dollar figure, and then as a percentage of revenue. Super big.

[00:02:35] Ben Hanson For those of you who are a little deeper into the P&L, like level below, you know, margins, gross margins, contribution margins, the spread, if you will, between what it, the revenue of something and the true cost of delivering those services or products for that matter. Ben Hanson Is there any one area that you see this kind of the most exaggerated in? And I'm thinking about, you know, some of the different, you know, areas like pricing, you know, your cost of goods.

[00:03:05] Ben Hanson Is there any other than you see this kind of the most obvious? Ben Hanson Is there anything else you're seeing? Is there anything else you're seeing? Or is there something else that you're seeing? Or like, you know, these are kind of the common root causes of profititis as you see it. Ben Hanson Yeah. You know, we have actually a little tool that helps people identify the most obvious, not the most obvious, we've already put those in the tool, helps them triage, if you will, of the 10 biggest profit problems, if you will, what might apply to that organization the most.

[00:03:34] Ben Hanson

[00:04:04] Profititis is often linked with getting out of Main Street or getting off Main Street or getting out of your niche and serving those customers with those products and services that you're not as good at. Ben Hanson How do you balance that with the drive for innovation? Ben Hanson Because as you're talking, I'm thinking about, you know, that growth that you talked about earlier, you know, really focusing on that leads you probably to want to innovate and develop other offerings and services.

[00:04:31] Ben Hanson But if you get away from your niche, you're actually, you know, you're going to dilute that. So how do you find that balance? Ben Hanson Sure. You know, there's like the difference there between being opportunistic and organic growth and then maybe being strategic, paring away things that are not working. Ben Hanson I think it's a healthy tension. There's probably two ways to go about that.

[00:04:52] Ben Hanson One is maybe sort of more cyclical, where for a period of time you're exploring new avenues, being organic, being opportunistic, and then maybe on some regular cadence, quarterly, semi-annually, annually, God forbid, every five years. Ben Hanson You know, taking stock of what's really going on. Ben Hanson And then you might think, gosh, we've been at this opportunity for three years. Ben Hanson It's not really paying off.

[00:05:19] Ben Hanson And is it the kind of thing that takes six years to incubate? Ben Hanson Or is it really that we're just not very good at it? Ben Hanson Yeah, it takes that ability to maybe look at yourself with very critical eyes on how you're working through things. Ben Hanson How does the people side or the people spend help or hurt profitability? Ben Hanson You know, where does it kind of quietly kill things? Ben Hanson Yeah.

[00:05:44] Ben Hanson I mean, there's so much that you could get from Googling that question sort of level one. Ben Hanson I mean, obviously, as payroll goes up, the question is, is payroll going up at a faster or slower rate than revenue or the total margin pool or something like that? Ben Hanson And obviously, if you're adding more payroll dollars faster than, let's say, revenue or contribution margin as a pool is going up, that is going to dilute your earnings.

[00:06:12] Ben Hanson I think that is sort of the most obvious level one answer. Ben Hanson That doesn't mean it's not an important one. Ben Hanson But just to go maybe one level deeper than that, I would say I think it's very valuable to think through what is the quality and caliber of the people that are working there. Ben Hanson And so it's sort of a quality question and then a fit question, whether it's fit for the role or fit for the company.

[00:06:35] Ben Hanson And I guess my point there is, if the average talent level of, quote, your talent is high, then theoretically you're getting a lot of bang for your buck. Ben Hanson And you should have a lot of opportunity to deliver a lot of value for clients, hopefully recoup a lot of revenue and margin from that and therefore profitability.

[00:06:56] Ben Hanson And if that talent level is lower, whether it's, you know, sort of at some absolute level or just maybe fit for your company, your vision, your market space, your customers, et cetera, then again, the reverse is going to happen. You know, payroll is going to go up as sort of a percentage or ratio of what you guys can deliver.

[00:07:20] Ben Hanson You know, HR often finds themselves at the table when we're having these conversations and they're being asked to cut costs and that usually means people. So I really liked the example that you gave there of how to evaluate your talent to make sure that you are continuing to increase your profitability.

[00:07:42] Ben Hanson What approach, though, should HR be taking in that room when they're bringing their perspective, their people perspective to the table about, you know, hey, we need to cut costs. But let's say if we cut this one program, we know that we have 50 percent of our population that participates in it and it could impact our culture, which could impact how our employees treat our clients, which, you know, like the downstream effect of all those things.

[00:08:07] How can HR bring a very strategic business mindset to those cost cutting conversations when there's some real table stakes about the impact that might not be as obvious as something of, you know, introducing a new product or taking a product away? Sure. I mean, it sounds like we're now talking about, you know, big company stuff.

[00:08:27] I used to work at Dell and Microsoft and have a fair appreciation for, you know, large company benefits packages and not just the direct benefits like your, you know, health care and things like that, but all the other programs and services. You know, I think I would probably say that even before you're in that room, it would be great to have already taken a very close eye to look at those costs, you know, in the sense of cost benefit.

[00:08:52] You know, everything is opportunity cost. And so before adding, before keeping, before enriching or paring down, you know, I think any program, you know, what is the cost and benefit? I'll just take a little story from my book. You know, when we had 100 employees, there was a common question that would sometimes come from employees. You know, why not like 401k matching or why not these other benefits and so forth?

[00:09:19] And, you know, I was always thinking we have X amount to spend, if you will, per employee to get what were, you know, for their total comp package, including the soft costs, you know, to kind of balance out, you know, our P&L, if you will. And then the question was often, would you rather have, you know, more benefits like, you know, richer health care or 401k matching, or would you rather have more salary?

[00:09:46] Because, you know, from a P&L impact, a dollar spent on one versus a dollar spent on another still cost me a buck. The question is, which buck do you value more as sort of a typical employee? And, you know, what we found, and can't say that's the same for everybody, is that our employees valued a dollar of salary more than, let's say, a dollar of 401k matching. And so that tended to guide the way I went about it.

[00:10:13] But obviously, you know, as a $13 million company, it's a lot different from a $13 billion company or wherever you are. So I don't know that I could speak directly to every nuance of that. I would say that being smart about your money all the time makes sense, certainly. And then I would recommend even before that meeting. But everything's a tradeoff. And I think ultimately, when you're maybe communicating to employees, we had to make a cut somewhere.

[00:10:41] Was it salary, headcount, benefits? We gathered some insight, hopefully, from both employees and management and customers and everything. And it felt like the least valued place we were spending X dollars was, you know, I don't know, free Cokes in the break rooms, whatever it was, as compared to payroll and whatnot. So, you know, now we just have water in the break room instead of Red Bull or whatever it is.

[00:11:10] That's such a good example because it touched base on a couple of things. You know, one, it's taking that very strategic approach and looking at where you're spending your dollars. The other thing, though, that you talked about was that investigation into your employee population and being really transparent about, hey, we do have to make some tradeoffs here. What would you like? What feels best to you, potentially, out of all the negative things, maybe?

[00:11:38] And, you know, we did this during COVID, right? But that's six years ago now. And so maybe we've kind of gotten out of this habit of having these open, transparent conversations about, you know, profit and making cuts and making decisions. So I love that you shared that.

[00:11:53] But, you know, as you work with different types of leaders, how do we incentivize our leaders, especially that middle management group I'm thinking about, to help impact these kinds of things so that, you know, we can have maximized profit and think about, you know, maybe not chasing revenue or cutting all of our expenses, but finding that balance and really incentivizing that middle management to be on board with these things.

[00:12:18] I think incentivizing is a great kind of a great word, but maybe the complementary notion that goes with incentivizing is how do you sort of track report and what are your metrics? And if you're hoping that someone is taking action on one thing, but measuring, metricing and incentivizing them on something else, people tend to, you know, do what you reward them for, if you will.

[00:12:46] And so I think so many times, so many businesses are truly incentivizing, whether it's employees or managers on revenue, rather than some flavor of profitability. And just a little story from my past. I used to work at Dell in the late 90s.

[00:13:03] One of the things that was very, very powerful at that time is they could look through to the end of what they were doing to determine what the margin dollar or contribution margin impact of almost everything was.

[00:13:18] If they were trying to sell a customer on a bigger hard drive or a bigger hard drive on 10,000 machines, if it was a larger company, the sales rep was looking right there on the screen that going from, you know, a one gig hard drive to a two gig hard drive added 35 margin dollars to the sale for every machine. And so they were very driven by margin dollars or a metric very closely associated with net profitability.

[00:13:46] And so I would just say, if you're trying to get your management team dialed in around profitability, are you measuring things, tracking things around at least some proxy around profitability? It's not always the case that everybody gets a clear look at your P&L.

[00:14:04] So I've got a client who's in retail and they are trying to think about how can we get our payroll cost to be 28 percent of our revenue, right? They're trying to push payroll as a percentage of revenue down. But that's not a very effective metric to share with everybody in the company. How can we smush, you know, your payroll and your cost down to 28 percent from 32 percent?

[00:14:33] But we were thinking, well, maybe the flip side of that is, you know, for every hour work is more like retail, consumer retail. We need to hit, let's say, 70 or 80 or 100 dollars of revenue. Right. So when you look at your shift of eight hours, how do we get to let's just pick a number, 800 dollars of sales. So maybe that's like, you know, can you supersize this or would you like to take our two for one or take one to go or, you know, whatever.

[00:15:02] And that, I think, is a metric that would be more, you know, rank and file friendly. Like, hey, you're there for X hours. We need to hit a certain amount of sales for this whole thing to work out. Right. So you could imagine, let's say, a mid-level manager running a, I don't know, a 20 million dollar P&L. I guess that's mid-level in some companies. You know, how are we getting, you know, you've got a cost picture.

[00:15:28] How do you hit a certain revenue target or a certain margin pool target based on the, you know, the budget that we have available of what we're spending? And that's not a big change to ask your employees. You know, I love that you gave the McDonald's example. I cut my teeth at 14 there and kind of learned the ways of business and stuff. And that, you know, I was in that environment where, you know, that little question about that upsell or the supersize was a big thing.

[00:15:56] And we had a lot of fun doing it together. You know, so there was a little bit of camaraderie and competition amongst the employees during the day as to who could also upsell the most. So it's a great example for that kind of space. As you think about different industries, maybe health care, nonprofits, you know, both those industries have either very small margins or very high budget constraints. Does your advice to those groups flex differently?

[00:16:24] Well, I don't know that we could say that, you know, retail, health care and nonprofit follow the same rulebook. I think that in health care and nonprofit, there may be an important consideration for many people. You know, I used to do a little bit of pro bono work with some nonprofits. I'm a big fan of helping kids here in the United States kind of get to high school, like ready to have a great life and succeed.

[00:16:52] And along those lines, you know, many people who work in nonprofit, and I'm going to hypothesize that many people who work in health care are, we'll just say, mission driven. And sometimes they think, hey, focusing on the money is like the opposite of being mission driven. So I don't want to do that. And a lot of times in those nonprofits, we sort of started kicking around this concept, no money, no mission, which is it's great to be mission oriented.

[00:17:19] But somewhere in that whole mix, things have to get paid for. And we're not going to be able to expand. We're not going to be able to track donor dollars, et cetera. If our, you know, the equivalent of our P&L or our efficacy or our cost picture or our, you know, service delivery per dollar contributed is not hitting some kind of, you know, benchmarks or thresholds.

[00:17:43] You know, like big donors don't want to, like if they're looking at two nonprofits, one delivers the same service, we'll just say for a thousand bucks a person. And the other one is five thousand bucks a person. It's often likely that the one who can deliver that more efficaciously is going to start drawing in more donor dollars.

[00:18:03] Right. So the net of that, and I'm just hypothesizing that that flows through to health care, is trying to, you know, get your your whole team, you know, from the bottom to the top, so to speak, on board that there's that there is money associated with this mission. And we have to either keep an eye on costs or cost efficiency, in some cases, revenue and upsell.

[00:18:26] You know, a lot of nonprofits are taking on these sort of like partially capitalistic models where they're getting some revenue to help offset some of their costs. Man, I hope that wasn't a big random walk. But I think for all these folks, you know, if you can get people on what I call the profit bus, which is sort of the rank and file in middle management, thinking about the profitability, the efficiency and the cost of things, it allows the whole organization to be more successful.

[00:18:53] Yeah, such such great advice and such a great perspective of especially in that nonprofit world. Right. Because the the second word is nonprofit. Right. So so talking about money seems counterintuitive, but you're right. You can't do the work unless you have the funds to do the work. So I really like that example. You know, as we wrap up our conversation, Ben, what is, you know, kind of one hard truth that you want our listeners to walk away with that they can implement today or can make a change to really increase their profitability in their organizations?

[00:19:23] Yeah. Maybe I'll just I'll go into that with a little bit of a story. You know, on our website, we've got a little bit of a video there with a client of ours who's in sort of the construction services and business services space. And, you know, what what happened is they would bid for projects as often is the case with construction. So, you know, we'll we'll do this work for pick a number, twenty five thousand dollars. Right. And then you've got a team that goes in and delivers that work. Well, there was kind of a communication gap.

[00:19:53] The people who delivered their focus was we need to deliver with excellence. What was missing is we need to deliver with excellence profitably. Or in their case, if let's say it's bid at twenty five thousand dollars to install this, maybe the budget is the equivalent of twenty thousand dollars worth of labor budget. We'll just let's just pretend that that's a hundred labor hours or five hundred labor hours.

[00:20:17] So by communicating to the team, hey, not only do you need to deliver with customer excellence, it needs to be delivered profitably. And in this case for this project profitably is, let's say, a hundred labor hours. Right. We want you to keep an eye on your time so that it's delivered with a hundred hours.

[00:20:37] And what we found that was so interesting is just that change in perspective, in communication and then tying it back like, hey, this project was a hundred. We told you a hundred. It ended up being delivered a hundred twenty five. We lost our shirt. What can we learn from that to apply next time?

[00:20:54] This client went from basically break even, you know, low single digit profitability over the last literally 20 years to more than 20 percent net profitability within a space of about nine months. And I think that is the power of sort of shifting thinking, both among rank and file employees, middle management and frankly, business owners.

[00:21:20] You know, very often, maybe two thirds of the time, business owners in that seven and eight figure type company. Sorry. Yeah. Seven and eight figure type company like one to one hundred million. Probably two thirds of them are not business background people. They used to be plumbers. Now they have a 50 million dollar plumbing company. They used to be attorneys. Now they've got their own firm, et cetera. And that doesn't mean that none of them are super dialed in on profitability.

[00:21:47] But it tends to shake out that about two thirds of them, maybe not so much. And really shifting to think, hey, we need to keep a close eye on profitability. We need to kind of communicate how we can look at that across the team can make a huge difference. Ben, all really great advice. Great stories. Love hearing the different perspectives and the different industries you're working in. So thanks for sitting down and going through this with me today. I appreciate it. Absolutely, Sherry. Thanks so much for your time.

[00:22:22] Thanks for tuning in to the HR Mixtape. Like, share, review and subscribe to support the show and help more people discover these conversations. Until next time, keep the conversation going.