There are four levers to increase profitability in a business. That's it, there's four. Not five, not eight, not ten, just four.

And if you know what these levers are, and if you have a tool to calculate them really quickly, you're going to be a powerhouse when it comes to running and leading a business. Or if you're sitting in meetings and you're up and coming, if you can pull out this tool and use it and show your team exactly how to improve profitability based on these four levers, you are going to look really smart. So let me help you to look really smart and look really good within your company.

All right, I just created this tool. If you go to coltivar.com, and I'm going to put the link in the show notes of whatever you're listening to, so whatever platform you're on, look in the description of this podcast. I'll put a link, you can click on it and follow that way as well.

Or you could go the long way, coltivar.com, that's my website. Go to resources and under resources, you'll find tools. Then under the that are listed, you want to look for levers of profit calculator.

This is a new calculator. We have a bunch of other calculators on there, but this is the one I'm going to walk you through right now. If you're listening to this and you're driving, please don't drive off the road by trying to navigate to this calculator right now.

Just listen to the context that I'm about to provide you and then try the calculator when you're in a safe place. Okay. Or if you're working out in the gym, I guess you could do curls with like one arm and then use the calculator with your other.

If you do that super impressive. Plus, if I ever saw you out in public and you're walking on the treadmill or going for a run and you're using the calculator at the same time, oh my gosh, that just brings so much joy to my heart. Just don't do it while you're driving.

Okay. This levers of profit calculator. The reason why I created this tool is because for years I just do it manually in a spreadsheet and I'm like doing it over and over again for all these companies.

I'm like, I just need to create a tool and then other people are going to find it so I'm just going to release it for free. So it's totally free, right? You don't have to like sign up, put your email in or anything. Just go there, click on the calculator and it'll pop up.

All right. So the four levers, and I talked about this in the last episode when I was explaining, if I had to start over again, this is exactly what I do. These are the four levers to know when it comes to profit, price, volume, cost of goods sold and operating expenses.

If you can control those and you know how to pull levers in those certain areas of your business, you can increase profit and you'll look really good. Like I said, you'll look really smart because there's not eight levers. So when I'm turning around a company and I'm looking at their income statement, I'm like, your performance is down.

I know in my head, these are the four levers, price, volume, cost of goods sold, operating expenses. That's it. And then I'll dive into the categories underneath each of those levers and I'll know which actions to take.

So it's actually pretty simple to read an income statement and then to take action to improve financial performance. You just have to know where to look. So this tool, check this out.

There are two things you need to enter to get the calculator going. Number one, your cost of goods sold as a percentage of revenue, which I'm going to explain here, and then operating expenses as a percentage of revenue. That's it.

You put those two things in, it'll spit out the four levers, and it's going to show you if you increase any of those levers by 1% or decrease them, if it's a cost item, it'll compute the exact impact on your company's profitability. So imagine that. Imagine the power of that.

You're sitting in a meeting and your gross profit's down or your operating profit's down and management's talking like, yeah, maybe we should do this. Maybe we should try that. What do you think? Like, should we change our offer? Should we change our funnel? Should we, you know, cut poor Sally out of HR and save that salary? And should we not renew our membership over here? Like, what should we do to increase profit? And a bunch of random wild things are going to come out of that.

Years ago, there was this consultant in the landscape industry. That's where I started. My first business was a landscape design build company.

And this guy was well-intentioned. It's just misinformed. He went around to these companies to, quote, turn them around to make them more profitable.

And he was arrogant. He was an arrogant son of a gun. And that goes definitely against my ethos.

Like pride, arrogance, yeah, ego, total turnoff for me. Anyways, he thought he's God's gift to the world, which he wasn't, but he'd go into these businesses and he would tell them to cut their overhead. And guess what? What's the biggest line item in overhead? Labor.

So he'd fire some of the best people because they were making the most money. And these companies would tink or he would advise them like, Hey, let's put restrictions on like the copy machine or let's turn off the lights or let's like reduce paper. And I'm like, okay, did you try to reduce your operating expenses? But that's not the best lever.

So out of those four levers, pricing, volume, operating expenses, and cost of goods sold, which one do you think is the most impactful in a business? Which one do you think is most impactful in your business?

So let me walk you through how to do this. And I'm just going to walk you through a sample company here. You could plug in the numbers if you're following along and you could do this on your phone. It's all mobile ready to the calculator. It looks good on mobile, or you could do this at your computer, whatever you want to do. So I'm in the levers of profit calculator, right? And I said, remember there's two inputs, cost of goods sold as a percentage revenue and operating expense as a percentage revenue, pull an income statement for the last 12 months in your company.

Okay. Because you want a full year of data and make sure you only include periods that are closed. So if you're in the middle of the month right now, or if the financials aren't totally closed for the current month, just go back a month and pull the last 12 months. So if you're in April, you're going to pull from May of the previous year to the end of April, that's 12 months, right? So then you'll look at cost of goods sold are right underneath revenue and cost of goods sold represent all the costs associated with fulfilling your product or service. Here's the caveat though. A lot of companies have dirty books. They're dirty. They're gross. They make me want to puke in my mouth.

I'm just kidding. That's a little dramatic. But the reason why they're dirty is because costs that should be up in cost of goods sold, like your labor costs. If you have people on the product or service, that salary or those wages should be up in cost of goods sold. But oftentimes they're not. Or think about this. You're a retail business and you have merchant fees. In other words, people swipe their credit card and you pay a merchant to process those credit card fees. Usually they're about two to 3% of your revenue, which you're swiping on the credit card.

So many companies put those down in overhead and operating expenses. Like it's a cost of goods sold. It's a cost of fulfilling your product or service because you wouldn't be paying merchant fees if nobody was swiping their credit card. So it's just little things like that. You want to make sure all your cost of goods sold represent all the costs associated with fulfilling your product or service. They include material costs, your direct labor costs, subcontractors, if you use them, or any other direct or indirect costs associated with fulfilling whatever you just sold.

Right? So find your cost of goods sold on your income statement and then divide that by your total revenue for the same period and then multiply it by 100 and that will give you the percentage of your revenue. Then navigate down below to operating expenses. Operating expense is made up of sales and marketing expense, general administrative expense, and your research and development, if you have any.

It’s basically your overhead, your SG&A, selling general and administrative costs. Your fixed costs of your business. I'm just giving you different ways of saying it because your financial statements may read a different way than what I'm saying. But it’s basically your overhead cost. Take your overhead cost, divide it by your revenue, that'll give you a percentage of revenue. Those are the two numbers you need.

So I'm on the calculator right now talking into my microphone and I'm going to type in 60, let me just say 60 percent for cost of goods sold. Then I'm going to go down to operating expenses and I'm going to type in 35. So let's just imagine the company has cost of goods sold of 60.

So revenue is 100 percent minus cost of goods sold is 60 percent. That means they have gross profit of 40 percent, right? 100 percent of revenue minus 60 percent cost of goods sold, 40 percent gross profit. But then they have to account for operating expense. So if you take the gross profit 40 percent minus 35 percent, you end up with five percent profit. So this company is earning a five percent operating margin. Based on this, as soon as you enter those numbers in, it's going to show you the impact on profit based on a one percent change with price, cost of goods sold, operating expense, and volume.

So what does yours say? If yours says 20 percent for price, okay, you did it right. If not, I don't know what you did. You did something totally wacky. I can't help you. All right, so pricing in this example is the most impactful lever. In fact, if you increase price by one percent, you're going to have a 20 percent impact on your profit. Cost of goods sold, if you decrease it by one percent by negotiating with your suppliers, by making your labor more productive, whatever it may be, it's a 12 percent impact on your bottom line. Operating expense is seven percent and volume is eight percent.

So remember that consultant that was going around destroying businesses? That's what he's doing. He's like, hey, I'm going to cut your operating expense. But that's the worst lever. I mean, it's still a good lever to pull, but it's only a seven percent improvement. Versus price, 20 percent. Cost of goods sold, which is 12. Or think about the person who's like, just grow, go and scale, do more revenue, sell, sell, sell, 10x, right? Okay, yeah, you could do that, but volume only has an eight percent impact on your bottom line.

And hopefully you don't grow yourself out of business because you run out of working capital, right? So that's where you have to understand these levers. And I just gave you the tool to look super smart. So plug this in for your company, then you're going to know the exact impact. And then you're going to communicate with more specificity and precision in your business. And you're going to look great because you'll sit in a meeting and say, look, if we just increase our pricing by one percent, we're going to have a 20 percent impact on our bottom line. So let's figure out how to raise our prices while also delivering greater value to our customers.

So let's redo our offer. Let's repackage our product. Let's invest in our customer experience so we can utilize that pricing lever. That's how this all works. See the beauty of that? See why I love all this stuff? And I can tell you specificity has power. If I just go into a company, I'm like, increase your pricing. It's going to work really, really well. You're going to increase your profit like a lot. Versus I go in there and I say, if we make a one percent impact on your pricing, it's going to have an 18.5 percent impact on your profit. What's going to exude more confidence in the people that are listening to me speak?

So specificity is key. Now you have the tool to do it. Just remember the reverse is true. If your price goes down by one percent, in other words, you discount one percent, you're going to lower your profit by 20 percent. So don't do that. All right. I hope you enjoy that.

Leave me some comments down below. And if you're listening on Spotify, there's an easy spot down below. You'd be like, Steve, I love this. I don't like this. This is confusing. You can say whatever you can say. I don't like the green on your calculator. You should do it in purple. You put that in there. I won't listen, but you say whatever you want. Also DM me. DM me on LinkedIn. Connect with me. I love to connect with you. I hear from you all the time, all around the world. I'd love to hear from you. If you haven't connected with me specifically, reach out on LinkedIn and let's just start a conversation, right? You don't have to say anything magical. Just be like, Hey Steve, I want to connect.

All right. Until next time, take care of yourself. Cheers.