Hi, I’m Mackey McNeill. And today I’m gonna talk to you about building a better toolbox. I’ll share a measure that you won’t find anywhere in the accounting literature. It’s an essential measure for every privately owned business. I’ll walk you through what it is, how to use it and why it matters.
I spent my career iterating and innovating ways to help business owners live more prosperous lives. To enjoy the three freedoms of prosperity, money freedom, time freedom, and freedom from worry.
What I’ve learned is that there are five mindset shifts that allow business owner to not only profit, but to prosper. Bring your head and heart to work. Change your focus. Use data as a convener, a unifier. Stop being a fulcrum and build a wheel. Build a better toolbox.
Today I’m gonna explain a metric that unless you know me, you’ve never heard of, but that every business owner needs and you’re gonna love it. Yes, it’s true, you can love numbers. And this metric is return to owner.
Here’s a quick backstory of how I discovered the need for this metric. In my monthly meeting with John, owner of a large retail and related wholesale business, I was flipping through his reports and we came to his trailing 12 month report on profits. John immediately saw the dip and he turned to me with this puzzled look, how could this be? Every metric was rising. How could profits have fallen? It was obvious why John was confused. He was right, every metric looked good. Sales, gross margin, overhead costs, revenue per dollar, it was all positive. I said to John, do you remember that we raised your rents? Following the move to the new building a few years ago, you set the rent as a best guess number. We finally got around to having a market analysis done and it turned out your rents were 40% under market. The attorney drew up a new lease and your rent increase went into effect last month. I did a quick math on a piece of paper so you could see it. Net income, June and July. You could see it went down $15,000. Rents though went up from 20 to 28,000. So rent plus that income were actually up $3,000. So it did look like he’d reduced his profit $5,000, but actually, he was $3,000 better off. John was relieved, he had worked so hard to turn the business around. Over the next few days, I kept thinking about John’s reaction. What was the point of metrics? If it didn’t really tell John what he needed to know, was his business continuing to improve?
Reflecting on my experience, I knew this wasn’t an uncommon challenge and it makes sense. Owners have many dual relationships with their business. They receive wages for working in the business. They received rents if they own the building, they receive royalties if they have intellectual property the business uses and they receive profits from ownership in the business. If these transactions wages, rents or royalties were with an unrelated party, they would have been negotiated. Each party would have an opposing interest. The landlord wants the highest rent possible for the tenant, but the tenant wants the lowest rent possible. But in the case of a privately held company, there are no competing interest. And like John, sometimes payments are a best guess of the marketplace.
Add to this confusion that tax law changes from time to time and in essence, incentivizes some types of payments over others. You put this all together and you can see that in a private business, profit is not a result of a series of arms length transactions in the same way that it is in a fortune 500 company. Back to John’s question, is he continuing to improve? The only real way to know was to create a metric that considered all the transactions John entered into, essentially with himself, a measure that added up profits, wages, rents and royalties, all the ways a business owner could potentially benefit from the business. I’ve used this metric for over 20 years. And it provides a perspective that just isn’t available from traditional accounting. To answer an essential and basic question, how did my business perform?
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