Stressed about profits? Start here.

LAST CHANCE - Renew your City of Los Angeles business license. City of Los Angeles business owners and freelancers, it’s time to renew your business license and pay your gross receipts tax. Registrations and renewals are due by February 29. Start here.

Something don’t feel right, because it ain’t right

This week, I want to tackle profitability, a top concern you highlighted in my one-question survey.

We often think of profitability as what’s left after we pay for everything in the business. This is also known as net margin, or net income. 

Usually, when I work with small business owners who are struggling financially, our first step is to focus on the less popular but very important gross margin. 

I asked ChatGPT to explain gross margin in a friendly style. Here’s what it expelled:

Imagine you're running a lemonade stand. You buy lemons, sugar, and cups to make your lemonade, right? Gross margin is like looking at how much money you make from selling lemonade compared to how much you spent on those ingredients. So, if you sell a cup of lemonade for $2 and it cost you $1 for the ingredients, your gross margin is $1. That's the money you have left over to cover other costs like your stand, utilities, and hopefully, some profit for yourself!

I’d give this explanation a solid C. Yes, gross margin is what you charge minus what it costs to make your product. The error? ChatGPT just told you and every other business owner that your labor for making and delivering things has no value. You get paid last, if there’s money left.

Most of you are making this mistake, too: when you set your prices, you forget to allow for labor. If you, the owner, are also the labor, and you do not put a wage for yourself into your pricing, how will you magically have money left? 

In accounting terms, you’re not counting COGS labor. COGS stands for “cost of goods sold.” It relates to the costs of acquiring, making, or delivering products or services. Investopedia explains this well. In a services business, most of your COGS will be people costs.

Maybe you hire a cute kiddo to run the stand, thinking more people will fork over pocket money to a cheeky tween. Let’s say you tell the kid they can keep $10 to stand in the yard for an hour. Or maybe 25 cents per cup they sell. Cheaper than you, but still a cost of sales. The kiddo equivalent on your P&L is the consultant or the revenue share that you’re lumping into overhead. 

Same goes for employees that work directly on production and delivery. A portion of their wages should be attributed to COGS labor. 

Do the up front work so you’re not replicating ChatGPT’s underpriced lemonade. When you’re reviewing your products and services, include the cost of people. Make sure your gross margins are high enough (I target a minimum of 30%) with all your costs included. See what that does to your profitability. 

If you’re stuck, or your profitability isn’t where you want it to be, let’s talk this week.

March dates to know

March 8: International Women’s Day. This year’s theme is “Inspire Inclusion.” This year, let’s go for some equity with that inclusion and pay speakers. 

March 14: Our monthly Ask Me Anything at 10 AM PT. Submit your questions here. 

March 15:  IRS and state annual tax filing deadline for S-corps, multi-owner LLCs, and partnerships. If owners need a K-1 report, this is your deadline.

Media Kit 

A big step up in visual AI. Last week, OpenAI announced a new text-to-video product called Sora that can generate one-minute original clips. (The link includes sample videos.) While not yet publicly available, the stunning improvement in video quality was enough to make Tyler Perry cancel his $800M studio expansion (THR). Sora could be available yet this year. 

To learn more, read or listen to this interview with futurist Simone Bovell on the opportunities and risks. Sora is also the headline topic in this week’s Masters of Scale podcast.

Global hiring in a snap. If you’ve found a great team member, but they happen to be in another country, check out Globalization Partners. They’ve set up co-hiring companies in 187 countries that incorporate registrations, compliance, and local benefits. You can set the terms of hiring and be up and running in another country in days to weeks. Here’s a short podcast interview with the founder on how she did it.