Latest / The Empire of Wealth / I Did _200M in Sales And Nearly Lost Everything

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I Did _200M in Sales And Nearly Lost Everything · The Empire of Wealth

• 0:00
  Speaker 1: If your business is starting to grow right now, I
• 0:02
  need to tell you something very uncomfortable.
• 0:04
  Speaker 2: You're not safe.
• 0:05
  Speaker 1: You now have something that with every sale creates more risk.
• 0:10
  And if you're just starting out, Stay with me because
• 0:12
  the safest business is one that is set up right
• 0:15
  from day one. And you're about to see exactly why.
• 0:19
  I know this because the year one of my brands
• 0:21
  did $ 200 million in sales is the year that I
• 0:24
  almost lost everything. Businesses often die in a sequence. Same stages,
• 0:29
  same order, nearly every time. By the end of this video,
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  you'll know every stage, the exact pages where each of
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  these stages shows up month to month, and where your
• 0:39
  own business is sitting right now in the bankrupt sequence.
• 0:43
  To help you understand and follow along in this video,
• 0:45
  I built the example business, Udi Junior, and all of
• 0:48
  the pages that you need to follow along for. Each
• 0:51
  of these, you'll actually be able to export from an
• 0:53
  accounting software like Xero. I'm going to go into detail
• 0:56
  about them in a second, but let me give you
• 0:58
  the high level. You may already know most of this. However,
• 1:02
  I can assure you that most founders ignore this side
• 1:05
  of the business and it's the thing that bankrupts them. First,
• 1:08
  quick disclaimer, I'm not an accountant. This does not substitute
• 1:11
  professional advice. So page one is called the profit and
• 1:14
  loss statement. You'll hear people call it the P & L.
• 1:17
  This is one page a month that boils down to
• 1:20
  four things. What customers paid you, What the product costs,
• 1:24
  that includes what it costs to make and ship, as
• 1:27
  well as what you spend on ads and what it
• 1:29
  costs to run the place, such as wages, rent and software.
• 1:33
  Whatever's left is your actual profit. And it answers one
• 1:37
  simple question. Is the machine actually making money? Page two
• 1:41
  is the cash flow forecast. Money in the bank, week
• 1:44
  by week, looking three months ahead. It answers a different question.
• 1:47
  Can you actually make it to Friday without running out
• 1:50
  of money? Page three is the balance sheet. And it's
• 1:53
  just what you own versus what you owe. Everything yours
• 1:57
  in one column, everything you owe in another column. And
• 2:01
  I'd bet most founders watching this have never really properly
• 2:04
  looked at the balance sheet.
• 2:05
  Speaker 2: Stage one.
• 2:07
  Speaker 1: When I started my brands, I went in completely blind
• 2:09
  on the money side.
• 2:10
  Speaker 2: I'm a creative.
• 2:11
  Speaker 1: I love product, brand, story, all of that fun stuff.
• 2:15
  And the numbers was always someone else's job. And for
• 2:18
  about two years, that felt fine because the sales were
• 2:21
  going up and that's the trap. Everyone keeps score with
• 2:24
  sales and mine were telling me that I was a genius.
• 2:27
  So let me show you what's actually happening underneath. This
• 2:30
  is Udi Junior's P & L on the screen. And
• 2:32
  believe it or not, despite it actually making money, it's
• 2:35
  actually in real trouble. So to read this, first you
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  do a 60 second scan and it works on any
• 2:41
  P & L. Start at the bottom to net profit.
• 2:44
  Did the business make money last month? And out of
• 2:46
  every $ 100, how many stuck around? Then jump to the top,
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  net sales. Was it up or down from the month before?
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  Then run your eye across these gray percentage lines. You
• 2:58
  want to look at product costs, marketing, running costs, and
• 3:02
  compare them to what they were previous months. And then last,
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  look for anything that surprises you. For example, a number
• 3:07
  that just suddenly jumped. Now watch what that scan catches here.
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  Look at the row called net sales first. That's what
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  customers actually paid after discounts and refunds. 30 grand in
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  January and then 62 by June. More than doubled in
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  terms of revenue. And the founder is probably celebrating because
• 3:23
  of that. Now drop down to cost of goods sold.
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  That's what the product costs to make and land and
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  see the gray line under the total, showing it as
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  a slice of every $ 100 of sales. Here we've got 40, 41, 43, 44, 45.
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  Speaker 2: 47.
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  Speaker 1: This means that something like shipping crept up or the
• 3:42
  supplier nudged prices or maybe you just added a few
• 3:45
  too many discounts. Everyone felt too small to matter and
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  nobody noticed because nobody was reading this row. And it's
• 3:52
  worth noting here that the formatting of your P &
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  L with clear color conditioning logic will make it really
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  easy for your eyes to spot the creep in gross
• 4:00
  margin and the net profit percentage. and save you having
• 4:04
  to do guesswork on what's actually wrong. You can easily
• 4:08
  set this up with AI or ask your accountant to
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  do it. Now, to the bottom of the page, net profit.
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  Look at the grey line underneath it. In January, $ 15
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  out of every $ 100 was profit. By June, $ 8. In
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  actual money, January made $ 4, 500 and June, on double the sales,
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  made $ 4, 009. The business doubled and the founder is making
• 4:30
  the same amount of money, but the Shopify screenshots of
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  revenue wouldn't show that. So this is the fix for
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  stage one. That 60-second scan every single month Reading the percentages,
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  not the dollars. You don't have to match the healthy
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  numbers exactly, but when one row drifts month after month
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  after month, that's the death starting and you just caught
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  it a year early. One small thing before we move
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  on from the P & L. There are two ways
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  that accountants or bookkeepers can actually count the cost of
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  your stock and it changes what this whole page means.
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  Cash accounting counts the stock bill in the month that
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  you actually paid for it. So let's say we place
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  a big order in January. That month, the profit and
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  loss will look like a disaster because all of that,
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  say $ 30, 000 of stock will just sit in that column.
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  But that means that the next two months will look
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  incredible because none of them actually have those cost of
• 5:24
  goods that are sitting in January. Therefore, none of them
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  are actually telling the truth of the business, which means
• 5:29
  the scan that I told you doesn't actually work. Accrual accounting,
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  on the other hand, counts the cost of each product
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  in the month that you actually sell it. So it
• 5:38
  averages it out over those months. And that's the only
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  way a P & L in e-com can actually make
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  sense and allow you to make decisions. See the little
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  line at the top of the Udi Juniors page? This
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  is an accrual basis P & L. Now, most businesses
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  under a certain sales threshold will legally be allowed to
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  be on cash accounting, which has some benefits. But you
• 5:58
  need to still have an understanding of what your accrual
• 6:02
  profit looks like month to month. You can either use
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  AI for this, or better yet, you can use your
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  accountant to build out a temporary P & L for you.
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  The other catch, this page is only as good as
• 6:11
  what flows into it. Same with all accounting. Every sale,
• 6:15
  every invoice, every receipt has to actually land in your system.
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  Because the small stuff that you skip now, the missing receipts,
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  the invoices that nobody entered, all of that comes back
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  to bite you in a real stage later. Now, the
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  profit and loss drift on its own doesn't kill you.
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  It sets up stage two, and stage two is the
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  one that kills profitable businesses. This one kind of sounds impossible,
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  so stay with me. You can be profitable, genuinely profitable,
• 6:40
  and still run out of money quickly. Because in e-commerce,
• 6:43
  you're often paying for stock months before your customer wants
• 6:46
  to buy it. The supplier wants their money now, your
• 6:49
  customers pay you bit by bit over the next six
• 6:51
  months as it sells. So there's always a gap, and
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  the faster you grow, the bigger the next order gets,
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  and the wider that gap can often stretch.
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  Speaker 2: Watch it happen to Udi Junior.
• 7:01
  Speaker 1: This is the cash flow forecast, and even though it's
• 7:03
  simpler than the profit and loss, payouts landing from Shopify,
• 7:07
  and by the way, Shopify doesn't always hand the money
• 7:09
  straight away as someone buys it, it lands about a
• 7:12
  week later sometimes. Then everything that's going out, such as ads, wages,
• 7:16
  and rent. And also the stock payments. You can see
• 7:19
  this 30 grand deposit to a supplier in week two,
• 7:22
  50 more when it ships in week eight. Now look
• 7:25
  at the bottom row, week eight. It's minus $ 7, 000. This
• 7:29
  brand in some ways is dead at that point. It
• 7:31
  cannot pay its supplier. And here's the sick part. August
• 7:35
  is shaping up to be the Udi Junior's best month
• 7:37
  ever in revenue because July was so strong. The profit
• 7:40
  and loss is asking whether the machine makes money And
• 7:43
  the bank is asking whether you can actually make it
• 7:45
  to Friday. And remember cash versus accrual from stage one?
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  This gap is the reason accrual exists. Because your profit
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  and loss counts the product cost in the month that
• 7:55
  you sell it. But your bank felt it months earlier
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  when the supplier got paid. Here's what this page is
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  actually for. If the founder considers this early, such as
• 8:04
  in week one, week eight won't be death anymore. It's
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  simply a phone call to your vendors. Hey, can I
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  pay the 50 in two chunks? Suppliers say yes to
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  that call all the time when it comes in seven
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  weeks early and almost never when it comes the day
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  the invoice is actually due.
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  Speaker 2: So this one's non-negotiable.
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  Speaker 1: 13 weeks ahead, if you're in a cash crunch, a
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  cash crisis, it should be updated every week against your
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  actual bank account. If you're not in a cash crisis,
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  you can probably do a monthly cash flow forecast. I
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  learned this the expensive way. The year one of my
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  brands did around $ 200 million in revenue, I bought way
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  too much inventory. And unless sales kept climbing and I
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  operated the business perfectly, I wasn't going to be able
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  to actually pay for the stock. Now, before stage three,
• 8:47
  I want to mention this is the most relevant sponsorship
• 8:49
  I've ever taken for this video because none of what
• 8:52
  I just showed you works unless the numbers are flowing
• 8:54
  in automatically and actually managed properly. Almost everyone needs an
• 8:59
  accounting system as their business starts to become successful. And
• 9:02
  I don't mean just when you're big. I mean from
• 9:05
  day one, because those two pages that you just watched
• 9:08
  me analyze, rarely do people build those by hands. The
• 9:12
  system builds them for you if it's set up properly.
• 9:14
  So this is why this video is sponsored by Xero,
• 9:17
  which I've used for every single business that I've ever
• 9:19
  owned since my first Shopify sale. Every Shopify sale, every
• 9:23
  ad invoice, every fee and receipt pulls into Xero by itself.
• 9:28
  Your tax will quietly add up in the background as
• 9:31
  you sell so the government's money never looks like yours.
• 9:34
  And the pages we're walking through basically just build themselves
• 9:37
  with one export. Best thing is, for a limited time,
• 9:40
  Xero's giving 90% off for six months through the link below.
• 9:44
  If you're at stage one or day one and want
• 9:46
  to stay organized, set it up this week while the
• 9:48
  business is still small enough to set it up right.
• 9:51
  Speaker 2: All right, back to the sequence.
• 9:54
  Speaker 1: Now, page three usually starts to become really important as
• 9:58
  you try to solve that case. gap. It generally becomes
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  really really important as you start to borrow money to
• 10:05
  actually close that cash gap.
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  Speaker 2: This is called debt.
• 10:08
  Speaker 1: The page I'm referring to is the balance sheet and
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  as soon as you start using debt it's really important
• 10:13
  to understand. And look, debt used well is a real
• 10:16
  weapon for this game. But when you borrowed a paper
• 10:19
  over a gap that you don't actually understand or haven't diagnosed,
• 10:22
  you turn a timing problem into a countdown problem because
• 10:25
  there are payments are fixed and your sales are not.
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  I should know, I did this full version of this
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  around that $ 200 million mark that I talked about. I
• 10:33
  had a huge amount of hubris. I spent $ 10 million
• 10:36
  buying a business, took on debt, tried to roll it up,
• 10:39
  make everything public and make hundreds of millions of dollars.
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  I lost focus, didn't have the right structures or the
• 10:45
  right people around me. Then sales suddenly collapsed due to
• 10:49
  poor execution and I almost lost everything. And here's what
• 10:53
  most founders don't understand about debt. Debt shows up on
• 10:56
  all three of the pages that I just mentioned. And
• 10:59
  each page only ever shows you a piece of that debt.
• 11:02
  The interest will land on your profit and loss as
• 11:05
  a cost quietly eating away at your profits. The repayments,
• 11:08
  the actual chunks of the loan going back each month,
• 11:12
  never touch the P & L. They only leave the bank.
• 11:15
  So the cash flow forecast is where these live. And
• 11:17
  the full amount you owe sits on the balance sheet,
• 11:20
  which means a founder who only reads the P &
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  L can watch a profitable month roll in while the
• 11:25
  repayments drain the account underneath. And generally the terms of
• 11:29
  the debt are what decide whether you survive it. Rates
• 11:32
  get all of the attention, but the repayment schedule is
• 11:35
  the part that can often kill people. And this is
• 11:37
  why so many brands get stuck on the hamster wheel
• 11:40
  using something like Shopify Capital, which is a useful tool.
• 11:43
  Speaker 2: But people often don't understand it.
• 11:45
  Speaker 1: For other forms of loan, a balloon repayment, for example,
• 11:48
  one giant chunk of payment due on a fixed date
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  is an existential risk for lots of people sitting in
• 11:54
  a calendar if you don't understand it. Because if you
• 11:56
  miss a supplier payment, you've got an awkward phone call.
• 11:59
  But if you miss a loan repayment, you might be
• 12:01
  in what we call default. And in default, the lender
• 12:04
  can actually demand the whole lot of your business. So
• 12:07
  as I said, the page for stage three is the
• 12:09
  balance sheet, the one that almost no founder looks at.
• 12:12
  And the truth is, it's super simple. The top block
• 12:15
  is everything you own, the cash, the money Shopify is
• 12:18
  still holding, stock in the warehouse, stock on the water.
• 12:21
  Then the next block, everything that you owe, supply invoices,
• 12:25
  the credit card, the ads bill that's coming up. Ignore
• 12:27
  the equity bit at the bottom for now. That's just
• 12:30
  the difference between the two. However, see that tax line,
• 12:33
  remember it because that's stage four. A while ago, I
• 12:38
  was at dinner with some nine-figure founders, some of the
• 12:40
  best econ brands in the world. three out of four
• 12:42
  of them had the same story, including me. They'd forgotten
• 12:46
  to set up sales tax properly in a region that
• 12:48
  they were selling into. And because they were growing so fast,
• 12:51
  by the time anyone noticed, the bills were $ 2 million.
• 12:55
  One of them was $ 10 million. And it happened to me.
• 12:58
  I wasn't doing anything exotic. I scaled a business to
• 13:00
  a million dollars in sales by its seventh month, and
• 13:03
  we're running at about 10% in profit margin. Except we
• 13:06
  weren't handling GST properly, despite me having a finance team.
• 13:09
  And GST in Australia works out to be about 10%
• 13:12
  to the business. So the whole time, the real number
• 13:15
  of profit was actually zero. I was running a business
• 13:18
  that made nothing and my own numbers were telling me
• 13:20
  that I was doing great because I didn't understand these
• 13:23
  financial spreadsheets and I wasn't tracking things properly. Tax is
• 13:26
  definitely the sneakiest killer in the secrets. There's a good
• 13:29
  quote that it's not what you don't know that gets you.
• 13:32
  It's what you know for certain that just ain't so.
• 13:35
  And this applies to tax a lot because people think
• 13:37
  that they've got everything sorted, but they don't actually have
• 13:40
  a professional looking at things. So let's look at Udi
• 13:42
  Junior's balance sheet again. We've got 17 grand of tax
• 13:45
  collected from customers sitting in the account looking exactly like
• 13:49
  their money. And back on the forecast, week four, there
• 13:53
  it is leaving. $ 17, 000 to the government in one hit.
• 13:57
  And this is months after it was actually collected. The
• 14:00
  founders who die here had already spent it without even
• 14:04
  realizing it. And if you're in your first year, this
• 14:06
  is the biggest trap there is because the tax money
• 14:09
  piles up in the account. And the most tempting thing
• 14:12
  in the world is to spend it on your next
• 14:14
  inventory order. So the stock arrives, sales keep climbing, and
• 14:18
  then the first tax bill of your life lands. And
• 14:21
  the money for it is actually sitting in the warehouse
• 14:24
  as inventory on the shelves. The coaches inside Daily Mentor
• 14:27
  put it bluntly. If you're operating on collected tax money,
• 14:31
  you're playing with fire and eventually you will get burnt.
• 14:34
  Speaker 2: The fix is boring and it works.
• 14:36
  Speaker 1: A separate bank account and a slice of every week's
• 14:39
  sales automatically moves into that bank account, especially closer to
• 14:43
  when the bills are due. This allows you to separate
• 14:45
  the government's money and what's yours. And remember, those missing
• 14:49
  receipts from stage one, this is where they land. So
• 14:52
  that's the sequence. Your costs creep up, then the cash gap,
• 14:55
  then the debt, and then the tax bill. And every
• 14:58
  single one of them was sitting on a page months earlier.
• 15:02
  So what actually kills the business? Honestly, it's just blindness.
• 15:04
  Every single one of those killers was sitting on one
• 15:07
  of these three simple pages months before it even landed.
• 15:10
  And when I look at my own mistakes, the answer
• 15:12
  is the same. I didn't have enough financial reporting or
• 15:15
  financial support and understanding. I still remember the day that
• 15:19
  this finally shifted for me and I became competent. Someone
• 15:22
  put a spreadsheet in place where everything was so clearly
• 15:26
  formatted and explained that I could clearly see every month
• 15:29
  in a clear format and I suddenly could actually act
• 15:32
  and make decisions. So here's what you should do and
• 15:34
  know you don't need to become an accountant. First, get
• 15:36
  yourself a bookkeeper. This is the person that reconciles every
• 15:39
  single expense that's going into Xero, every single invoice and
• 15:43
  puts it.
• 15:43
  Speaker 2: To the right category.
• 15:44
  Speaker 1: And make sure they know your country's rules because I've
• 15:46
  watched founders hire the cheapest offshore option, the books come
• 15:50
  back with things like American accounting roles, and it costs
• 15:53
  them real money in the later years. Now, an accountant
• 15:56
  is often a different job. They interpret the numbers and
• 15:59
  handle your tax strategy and also the lodgements to the government.
• 16:03
  Some definitely will do the bookkeeping as well, but most
• 16:06
  won't and it's actually cheaper to separate the two roles.
• 16:09
  And if you're a beginner that really can't afford either yet,
• 16:11
  let's say you've got one or two sales, Sit down
• 16:14
  with AI and learn to do your own books, but
• 16:17
  know that this has risk and you're probably going to
• 16:19
  have to get someone eventually to look over what you've done.
• 16:22
  But using AI, it has now never been easier to
• 16:25
  actually learn all of this stuff yourself. This is simply
• 16:27
  because you can screenshot it into the tool and ask
• 16:30
  what you should do next. Second, keep your financial team honest.
• 16:34
  Inside Daily Mentor, the rule is have the books closed
• 16:37
  by 7th to the 10th of every month. And if
• 16:39
  your accountant is sending you numbers every six months, That
• 16:43
  is so, so bad. You need to ask them for
• 16:46
  monthly reports so you can adjust your business accordingly. The
• 16:49
  next thing that you should do is actually ask questions
• 16:52
  to your accountant about what they see. Most founders think, oh,
• 16:56
  this is just finance. This is black and white. I
• 16:58
  can't challenge the accountant on anything. And that's just not true.
• 17:01
  The founders that just blindly believe all of their financial
• 17:04
  staff are the ones that end up dying from financial illiteracy.
• 17:08
  And third, actually read the pages on a rhythm. The
• 17:12
  P & L every month, the balance sheet every month,
• 17:14
  and the cash flow forecast every week if you've got
• 17:16
  a weekly forecast. If you want to learn more about this,
• 17:20
  I've actually built a full AI CFO that does MCP
• 17:24
  into accounting softwares. And we actually build out this full
• 17:27
  report for you in Daily Mentor. Click the link for
• 17:30
  more information.