You don't have to be this big accounting nerd, doing all these debits and credits and whiz bangs and magic in order to be effective with finance. This is Boosting your Financial IQ, where I help business professionals with financial responsibility to elevate their careers and run profitable companies. My hope is that you'll apply these lessons to achieve your greatest ambitions, cheers and enjoy If you're making financial decisions in your business. I'm going to show you how to compute the X factor, what it is, how to apply it to drive better behavior and, ultimately, how to increase your profitability. So here's the deal. It's super easy to compute. If you go to your income statement, your P&L, your profit and loss statement all the same thing and you look at the very top line, that's going to show you how much your company does in revenue or in sales. Then, if you scroll down to the very bottom of the same statement, you'll find net profit. Right, that's your net profit margin. So if you take your revenue and divide that by your net profit, you will come up with your X factor. So let me put some numbers to it. Let's say your company does a million dollars in top line revenue and you have $50,000 in net profit. Well, a million divided by 50,000 is 20. So that's your X factor. It's 20. Let me give you another example. Let's say you have a million dollars in revenue and a hundred thousand dollars in net profit. A million divided by a hundred thousand is 10. That's your X factor. So the higher your profit margin is, the lower your X factor will be, which is a good thing. So let me explain Back in the day, when I was 16 years old, I started my first company.

It was a landscape business and my financial literacy skills were like zero. I could barely even read a financial statement, let alone understand the levers of profit to really influence our financial performance. But as the years went on, I did learn how to compute the X factor and that was enough to radically change behaviors and mindsets throughout my organization and it increased our profitability. So here's the story we used to do these big projects right, these big landscape projects. Sometimes jobs were over a hundred thousand or over 500,000, but we were doing these big projects right, these big landscape projects. Sometimes jobs were over 100,000 or over 500,000, but we were doing these big jobs right.

And we had these landscape rakes. They were these big metal rakes and at the time, back in the late 90s, the early 2000s, they were over 100 bucks. So that was a lot of money back then. Nowadays it may not seem like a lot of money, but it was a lot of money. And so we'd have these big rakes that the crew would use and they would rake the soil, they'd remove the dirt clods and they would provide a fine grade, so then we could lay sod down and then create these beautiful lawns for people, right?

So inevitably the crew would be out there, they'd be raking the soil and then they would leave the rake on the ground and then somebody would come along in a skidster that's a tractor like a front end loader, that's what we used to scoop up dirt and rock and move it around the job site. They'd come along in the tractor and they'd run over the rake because they didn't see it or it was in a blind spot. They'd back over it, whatever it was, and it would mess up the rake and of gnarled it into this pile of metal. And I'd always get frustrated when I was on the site and I saw another broken rake. I'm like what the heck? We just bought five more rakes and you just broke three of them. Okay, what's going on. They're like Steve, just chill out, it's only a hundred dollars. You're making all this money on this job. It's over a hundred grand. I think you can afford a broken rake.

So when I figured out this X factor, everything changed, like I said, because the communication changed. Let's just go with the 20X example. So remember I said a million dollars in revenue divided by $50,000 in net profit. Our numbers were a lot higher but nonetheless our X factor was around 20 at the time. I know kind of sad, but that's what it was. So then I would go to my crew and say look, here's the X factor and here's how you apply it. If you take the X factor and you apply it to a cost or a discount in your business, it will tell you how much you have to do in revenue in order to make up for that cost, that discount or that loss. So in this example with the rake it's a hundred dollar rake Our X factor was 20.

That means a hundred times 20 meant that we had to go out there and do $2,000 more in revenue in order to pay for that rake. Because you have $2,000 in revenue, you do the math and we'd end up with a hundred dollars in profit at a 20 X factor and that would give us just enough money to go buy another rake. And so I told my crew that I said, look, we have to go out there and do $2,000 more work. So remember that rock you moved on the side of the house the other day. When you're sweating, your back was like breaking and you're like cursing me out for doing this. When it's a hundred degrees, guess what. We have to go do that again in order to pay for this rake, because that's equivalent of $2,000 of more work. And they're like, oh, okay, I see.

Then I expanded this example to my estimators, my sales team, when they're going out there to close projects and a customer would say, hey, look, the job is yours if you can just come down by $1,000. And it's like, okay, we'll apply the 20X factor. So 20 times 1,000 means that you have to go out there and sell $20,000 more of work. Go execute on that work at the same margin, just to cover that $1,000 in discount that you offered that client. And they're like, wow. And their minds are like, right, just exploded. This changed everything in my business because we got rid of discounting. We're like this is the price. This is what it is. We were way more careful with our tools and our resources, which reduced our cost of goods sold, which increased our gross margin and, ultimately, our bottom line.

And so it's simple things like this, like the X factor, that I'm explaining to you right now, that you could learn and you could apply to your business and, as you'll notice, you don't have to be this big accounting nerd, doing all these debits and credits and whiz bangs and magic in order to be effective with finance. Super simple, right, it's just basic math, and I know you could do division because you're smart and you're way smarter than that and you can even handle more advanced topics. But that's where the X factor is super powerful. Compute it in your business, start communicating it to your team and eyes will open up and, all of a sudden, your financial performance will improve. All right, that's what I have for you. If you found value in this, as always, I'd love for you to share, so we can get the word out there and until next time, take care of yourself.