There are certain stages of business where you need to grow because you're in the death zone. For example, when you're doing under a million dollars in revenue, you have to grow because it's really hard to sustain that in most businesses.

All right, there's some caveats to all this, of course, but until you hit a million dollars in revenue, you are gonna be stuck doing everything and you run the risk of burning out. Now, between one million and three million dollars, what happens is you start hiring people to support you and to start handling the work, but then you don't have the scale to cover their expensive salaries. And therefore, you need to grow to the next level because all your costs are creeping up and your margin is starting to shrink.

And this is where the business continues to have this thirst for growth or the owner's thinking, I need to grow. We need to become a bigger company. Maybe it's ego, maybe it's something else, maybe they just wanna have a big company because they hear growth is what you need to do.

Growth is good. If you don't grow your business, you're dying. And I agree with that and I agree growth is super important, but I've also been a leader of a company where we've grown very quickly and margin didn't keep up.

Then at the end of the year, we look at our numbers and we're like, wow, we did all this work, we had all these headaches, all these fires that we're putting out. And sure, we did more, we grew, we expanded our office footprint, we hired more employees, but we're making less money than we did in the past. That's why sometimes growing revenue isn't growing your business.

So today I'm gonna talk about the margin gap and explain what it is and how to fix it in your business. So what is the margin gap? The margin gap is when you're selling more, you're doing more revenue, but you're keeping less. And why? This happens because growth outpaces systems.

So when you don't have systems, documented processes, checklists, standard operating procedures, then things start falling apart and there's inefficiencies throughout the company and you start losing money. Or maybe it's pricing discipline. You wanna grow, so you offer some concessions or you discount your work.

And then you start building this overhead and then you get into this rat race. I've been there before. You have this overhead to support, work starts slowing down, you start to panic.

So you go out there and you bid work, right? You're bidding jobs, but you're lowering your pricing to get more work because you need to keep your team employed and then you start attracting the wrong customer and then it creates all sorts of problems. So there's pricing discipline. And then the last thing is labor productivity.

So when you're bringing on new employees, it costs you more money. And until they get up to speed on how to do things and going back to the system part, if you don't have a good system, guess what? Your labor is not gonna be efficient and therefore you're gonna lose money. I've seen this happen all the time.

The other thing that I'll say with labor productivity, I've had some CEOs that I've worked with where in the past, before they started working with us, they thought, look, I'm gonna bring on certain people with certain skillsets and they're gonna develop the systems. So they'll hire, for example, a sales and marketing person. And they're like, okay, I'm gonna bring in Susie.

And then Susie, she has all this experience with sales and marketing, so she's gonna build the system. Then we're gonna have a system that's documented and then we're gonna scale. But I could tell you having somebody who's an architect, who's design-minded, right? Not like a literal architect, but an architect of a system and then a doer of a system is very rare to find.

You can find it sometimes. I'm just saying the same person who designs often has different skillsets compared to somebody who does, who does the work. And so that's where you gotta be really careful because I've seen this trap over and over again where CEOs hire a bunch of employees thinking that's what's gonna give them the scale.

But it doesn't always translate and they burn through a ton of money. I went and turned around a large construction company who did this very thing. Unfortunately, I had to go in and help the company make the cuts.

So I was seen as the hatchet man, this bald-headed, if you've seen a picture of me, this bald-headed guy, and they're like, he's just the hatchet. He's just coming in and cutting all these jobs. And I'm like, yeah, I'm cutting all these jobs because your CEO made bad strategic decisions and thought that just by hiring a ton of people and throwing them into offices, the business was gonna magically have all these systems and scale.

And they didn't. And therefore, they had lower margins which led to profitability and liquidity issues. So there's some causes of margin erosion.

So I kind of touched on a few, but let me just go deeper into this. Number one, underpricing jobs or ignoring the true cost to serve. So many business leaders don't understand their numbers.

I was working with a service-based company years ago as a specialty contractor, and they were selling over 400,000 labor hours a year. I say selling, but that's how many employees they had. Essentially, they had 400,000 labor hours to offer out there in the market to do their specialty trade, right? And here they were bidding these jobs and they were off by like two bucks an hour.

And I'm like, oh my gosh, you're bleeding $800,000 a year because you don't even know your labor cost. And it seems simple, right? You're like, oh yeah, I pay this person this and this and this and add it up and here's the average. But it's a little bit more nuanced than that.

You have to calculate your labor burden. You have to understand your forward rates. Like what's gonna happen to labor in the future? Because if you're bidding work six months, eight months, 12 months out, but you're not accounting for that in your current labor costs, guess what? You're gonna be submitting bids, winning the work, and then starting in the future at a labor rate that's higher because you've had to give people raises or you've hired people that are more expensive.

So underpricing jobs or ignoring the true cost to serve is a problem. When it comes to underpricing jobs, I was just working with a landscape company recently and I was helping their sales team to think through how they can improve their efforts, right? Strengthen their offer and have more confidence when they're meeting with clients because what they're doing is they had the mindset that they were too expensive. They're at the top of the market and they were doing a lot of high-end work, right? Working on some amazing properties for some high net worth individuals.

But they would go out there and they're like, yeah, we're just like expensive. And whether they would say it, they wouldn't necessarily say that to the client, but they'd think that and that would be conveyed through their behaviors and through their speech and through their sales presentation. So knowing your true cost is really critical because this business, if you looked at their numbers, they're actually underperforming as it pertained to their margin.

So they weren't the highest in the market. They actually should have been charging even more or they had to fix some efficiencies out in the field to maintain the margin and to earn a margin that was aligned with just average performance. Okay, so underpricing jobs is a major problem.

It starts with not knowing your numbers. It also comes from your sales team not having the confidence to go out there and to pitch and to say, hey, look, here's our offer. We're confident with our numbers.

Here's why we offer this value proposition. We stand behind our work. Here are all our benefits, et cetera.

And I'm not saying like you're sleazy or you're just cringy with your sales approach. I'm not saying that at all. It just means that you're confident because your value proposition makes sense in the marketplace and you're able to back it up.

And therefore you deliver the value which justifies the price.

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The other thing is labor efficiency, low return on labor. I just did an episode last week where I talked about the three efficiencies. So be sure to check that out because I walk you through how to compute your labor efficiency, your return on labor. But your labor may be inefficient because you don't have the right equipment. Maybe it's outdated. Maybe it's breaking down all the time. Or maybe you don't have technology. So you're using all these paper processes. You're completely inefficient or they're not trained or they don't have production rates or just standards.

Maybe there are no KPIs. Maybe you don't have success measures for your team. So they're just out there winging it. And you're just like, okay, just do it. And imagine that. Imagine if you were a coach and you're responsible for training somebody and helping them to run a faster mile. And imagine you just show up to the track and you're like, yep, just run around the track and run hard, do the best you can. And they run a mile. You don't have a stopwatch. You have no way to measure their progress. And then you're like, okay, see you here next week.

And then you do that over and over again. How the heck would you ever improve performance? Instead, what you're gonna do is you're gonna have a stopwatch. You're gonna be like, okay, run the mile. You're like, okay, you're 6:45. All right, let's talk about how we can get you down to 6:30. And then they run a 6:30 mile. And then you're like, okay, let's run sprints. Let's do some more leg workouts. Let's change your nutrition. Let's get you under five. And you're just constantly improving performance.

I did this workshop last year for a solar company. And during this workshop, we did this exercise where they had to all go through this hula hoop. And so each member had to pass through the hula hoop and then I was timing them. And the first time they did it, it was something like 45 seconds, right? They're uncoordinated, sloppy, bumping each other in the head with the hula hoop. It was just this awkward sight. Then they did it again. And it went from 45 seconds down to like 33 seconds. And then it dropped again, dropped again, dropped again.

Finally, the last time I timed them, it got down to like 17 seconds. So what gets measured gets improved. But so many companies don't measure their labor and they don't invest in their labor. And therefore they have low returns on their labor, which hurts their margin because labor is one of the biggest costs in a business.

Next, it could be poor revenue mix or bad fit clients. So you could be pursuing work that either doesn't align with your capabilities and strengths, or you're going after customers that just aren't a good fit where the margin isn't. And this could be a major problem because even if you go after low margin work and you do it efficiently, you're still earning low margins. So that could be a problem, but that's a strategic problem because you need to decide where you're going to compete, how you're going to compete and how you're going to win in that space. And like I said, it starts at the top with strategy.

Or the last one is you can be overspending in your overhead to fuel growth. And that goes back to what I was saying earlier, where you just hire people because you want to just grow and you bring on all this overhead because you think that if you invest in all this stuff, growth will come. Well, this isn't the field of dreams. Remember that movie with Kevin Costner? If you build it, he will come, like he builds a baseball field and they come play on it. That's not how business works all the time. Sometimes it may work. It may have worked for your buddy, but it doesn't mean it's going to work for you.

So overspending on overhead to fuel growth isn't always the best strategy. You have to have other things in place and then double down on what's working. But in order to know what's working, like I said, go back to last week's episode where I talk about your sales and marketing efficiency. You're measuring your operational efficiency and your value creation efficiency. And when you're crushing it on all those three metrics, then you pour the gasoline on and grow.

So here's a solution. What do you do if you're in the situation, you have revenue and you're not earning the margin?

Number one is to align pricing to gross margin targets because pricing is going to be your number one lever. It's your number one lever. In fact, at Coltivar.com, if you go to the website, go to resources, you'll see these calculators that we created. We have this one called the four levers of profit. And if you just enter a few numbers in from your company, I think it's like two numbers, it will tell you exactly what your four profit levers are and how a 1% improvement in any of them will have an impact on your bottom line. And you'll find that for the majority of companies, pricing is the number one lever.

So that's the first thing I would do is align your pricing to gross margin targets. Make sure the value is there though, because if value exceeds price, customers buy because they see this excess value. If price exceeds value, customers aren't gonna understand your value proposition and they'll just see somebody else or they'll beat you down on price.

Next, boost operational efficiency. So you should be measuring revenue per hour. This is your throughput. You should be looking at scheduling and you should be investing in the equipment, the tools, the resources, the training, et cetera, to drive efficiency. And be ruthless on eliminating friction and waste in the system.

And then lastly, shift from volume to value. It's all about high margin, right fit projects because otherwise you're gonna be going after all this work. You're gonna be burning out your team. You're gonna have to invest in all this equipment, trucks, trailers, et cetera, to do the work. And then the margin's not there. And it's like, you should have just done less work with the equipment that you have and be just as profitable.

So how do you measure this? And how do you actually fix the gap?

Number one, I would start forecasting cash if you don't do that already and gross profit by segment. And that's gonna tell you, okay, where are you making money and where are you not making money? That's why building a forecast, understanding your historical financials and having in place key performance indicators will be critical to this entire process. Otherwise you're just blind. You're just like guessing and you don't wanna do that.

Start tracking margin by project and by client. We did that like when I was a CFO of this construction company, we tracked margin by segment, by our data centers, by healthcare, by retail, all the verticals we were competing in. And then I took that margin and I divided it by the number of days we were on the project to give us a margin per day. And that helped us to understand our throughput better.

All right, and then the last thing is setting up success measures for teams. So make sure your teams understand what does success look like. We call these success measures at Coltivar. We believe every employee, especially at the top, should have three to five success measures. In other words, they know exactly what does success look like in their role, okay?

So before you chase the next million in revenue, make sure you fix the leaks that you have today because I guarantee you, you're probably leaking money in more areas than you think in your business.

When we go into companies, we have this program, it's called Boost. And we go in and we find $100,000 in 14 days. And what we find when we do this is that so many companies are bleeding, like bleeding money.

One company that I recently did this for, they're bleeding $1.5 million a year. And we could just do a few things to fix it. And I told them, I was like, even if we do a terrible job, right? We do a terrible job. We're like the worst company in the world. And we only fix it by a third. I'm like, you're still making $500,000 more in profit.

So I could tell you, the majority of companies, very rarely do we come across a company where like, yeah, you don't have any leaks. The majority of companies are leaking cash. And you could be leaking cash right now.

So these are just some things to pay attention to in your business. And we have a ton of free resources for you at coltivar.com. So be sure to check out our website. We have trainings, we have tools, and we have other things that will help you along the way to fix your margin and to be highly profitable and to have a ton of cash flow so you feel great. So you have that freedom and that security and you're not running around chasing revenue and creating all this chaos.

All right, that's what I have for you. Until next episode, take care of yourself. Cheers.