Episode #67: Diagnosing “Profititis”: Turning Manufacturing Growth Into Real Margin with Ben Hansen
In this latest episode of U.S. Manufacturing Today, Matt Horine interviews Ben Hansen about “profititis,” where revenue grows but net profit stays flat or declines, creating stress and vulnerability to shocks. Hansen, a former Microsoft and Fortune 100 executive and five-time Inc. 5000 founder, explains how rapid growth in his staffing business tripled revenue while shrinking net margin from about 20% to 7%, and argues manufacturers can’t “sell their way out” of unprofitable pricing or work. He highlights common founder-led blind spots in P&L management, the importance of variable cost structures—especially labor—to handle demand swings, and links higher margins and faster invoicing/payment terms to improved cash flow. Hansen outlines his Profit 180 four-step prescription: profitability mindset, profit acceleration, “profit CFO” financial discipline, and profit growth by focusing on the most profitable customers/products, and recommends scheduling weekly “Money Mondays” to work on profit.
Links
- Ben Hansen on LinkedIn
- Profit Doctor on LinkedIn
- Profit Doctor Website
- Veryable Is Revitalizing U.S. Manufacturing
- Sign Up on the Veryable Platform
Timestamps
- 00:00 Profititis Warning Signs
- 01:33 Ben Hanson Background
- 04:38 Defining Profititis
- 09:02 Selling Unprofitable Work
- 11:57 Founder Blind Spots
- 14:51 Variable Costs and Labor
- 20:45 Cash Flow and Invoicing
- 31:24 Profit as Risk Buffer
- 36:56 Four Step Profit Plan
- 44:14 Money Mondays Action Step
- 47:03 Resources and Wrap Up
Episode Transcript
Matt Horine: [00:00:00] Welcome back to U.S. Manufacturing Today, the podcast powered by Veryable, where we talk with the leaders, innovators, and change makers shaping the future of American industry, along with providing regular updates on the state of manufacturing, the changing policy landscape, and more.
There's a quiet problem spreading through the U.S. manufacturing sector right now, and it has nothing to do necessarily with tariffs, reshoring timelines, or supply chain disruptions. It's something more fundamental, and the symptoms look like this: you've grown your revenue, your order book is full, you've added headcount, expanded capacity, and maybe even made some capital investments.
But at the end of the quarter, the margin just doesn't show up the way that it should. Today's guest, Ben Hansen, calls this profititis, and he's made a career out of diagnosing it and curing it. Ben is a five-time Inc 5000 founder and former Fortune 100 executive who built an eight-figure staffing business from the ground up.
Today, he works with owner-led companies, many of them in the two to $50 million range, to uncover the hidden profit leaks that show up specifically [00:01:00] during growth, the kind that conventional accounting doesn't necessarily surface and that most operators never find until it's a little too late. Today, we're going to get into how manufacturers can stop the financial bleeding, turn revenue momentum into real margin, and make sure that the investment they're putting into reindustrialization actually pays off.
Ben, welcome to U.S. Manufacturing Today. Matt, thanks for having me. Really looking forward to it. We're very excited to talk about this because it is a common conversation, almost constant conversation with manufacturers looking to find ways to win in this environment. But before we jump into all that and diagnosing the problem and looking at your methods, wanna talk a little bit about your background.
You've got a pretty broad spectrum of experience. The journey that you had from Microsoft to building your own large staffing firm. What built your instincts around profitability through those experiences?
Ben Hansen: I gotta tell you, Matt, I think I, I was just always wired around money from a young age, and so I guess I was almost naturally wired both [00:02:00] around money and profitability.
And if you think of, like, Stephen Covey, keep the end in mind or begin with the end in mind. And I guess I always felt that the end in mind was supposed to be profitability and what you took away from the business in terms of financial outcomes. So even when I worked at a dot com before joining Microsoft, I was running programs of, like, how can we generate ROI out of this program?
How can we get profitability out of this program, rather than just eyeballs or traffic or whatever? How do we focus on- Conversion, and how do we turn conversion into revenue, and how do we make sure that revenue is landing in terms of profitability? So I think I've always been wired that way, even when I started my business after leaving Microsoft.
I started with a pricing sheet, like a business model, trying to make sure that even if we had a good amount of revenue, we'd have a great amount of profitability.
Matt Horine: Well said. It's something that people miss. They're looking for just the top line growth or the important incremental metrics that [00:03:00] are maybe in their day-to-day roles.
You spend a lot of time and have some experience building and maybe even exiting your own companies. What's the moment you realize the gap between top line growth and real financial health, and that most operators miss?
Ben Hansen: When I worked at Microsoft, I hired a lot of contract consultants to do various projects and programs for me.
Mostly what we worked on was enterprise-oriented programs like adoption and deployment, and the point of that is you don't write a check to an agency. You create a program for early adopters, and you have a team to actually implement that work And as I was onboarding people to work for me, sometimes from some very small upstart agencies, I realized that many of these agencies, even though they had a large amount of revenue, were basically struggling financially in terms of cash flow, ability to pay their suppliers and subcontractors, and actually [00:04:00] having any take-home for themselves.
And so I realized when I rolled out my firm, I wanted to make sure that my pricing model and business terms, how I got paid from the customer, how I paid my subcontractors, was going to work out in a way that my business was gonna be successful if I had a large amount of revenue and when maybe things dipped down and I had a smaller amount of revenue.
Matt Horine: Yeah, it's well said. I think that's something that a lot of folks battle every day, the, kinda what's left over at the end of the day after having those subcontractors and whether it's consultants or some type of engagement going on in a manufacturing environment, people are fighting that battle every day.
So let's get into some of the, the definition of the problem, and specifically around your, your program and defining it in your own words. It caught my attention when we first met to record the show. What is Profititis, and why is it particularly dangerous right now for the US manufacturing sector?
Ben Hansen: You know, when I started my company, we did really well.
We grew from zero to about [00:05:00] 20 consultants over the space of maybe two years. And because our average order value for those consultants was about 160 to 200,000 each, 20 consultants worked out to somewhere in the neighborhood of $4 million a year in terms of revenue. So it only took us about two, two and a half years to get to a pretty good chunk of revenue, about $4 million.
And then I heard from my primary customer that they were gonna go through a big vendor consolidation, and I'm sure that hits some of your listeners very closely. And so I'm like, "Okay, I got the answer to this, no problem. I'm gonna go on a massive growth push. I'm gonna forward hire several sales reps so that even if they don't sell a ton, as long as it's break even, I am going to be able to really increase my top line, become a bigger supplier, a bigger fish in the same pond, so hopefully when my customer cuts off the bottom [00:06:00] 20% of suppliers, I'll be at the 50% point instead of at the 15% point," right?
So over the next probably five years or so, we grow the business from about four million a year to 13 million a year. And through that process of about 40% annualized growth, we won maybe five back-to-back Inc. 5000 fastest growing private company type awards. But what happened interestingly is I tripled the top line over those five years, but the bottom line in the terms of dollar figure stayed about the same.
So we went from roughly around 20% net profitability to 7% net profitability. And to me, that is like the definition of what we call profititis. And the idea is that the top-line revenue is significant or still fairly healthy or growing, but the bottom-line profitability is [00:07:00] weak, flat, sagging, sick, or short version, healthy top line, sick bottom line.
Because again, if you can imagine going from $4 million in revenue to $13 million in revenue, but a profit line of call it a million dollars staying at a million dollars, that means your cushion, your buffer, whatever, goes from 20% to 7%. Another way to look at that, I'm doing three times as much work for the same reward.
And not only is it three times as much work, but when your profitability gets skinnier, often what that means is that your headaches are like exponentially more. Things are more problematic. You have less cushion. Everything is more stressful. And I guess I kind of learned the hard way of what it's like to dramatically do...
grow top line, do more work. We went from 20, 23 people, let's say, to 100 people. I'm keeping the same. The [00:08:00] problems are 10X. The work and the headaches and the stress are also 10X The best way, I would say, to protect yourself from all manner of business shocks and problems, whether it's tariffs or supply chain or labor shortages or regulation or leadership crisis in the business, or somebody quitting or resigning or embezzling or all those things, is to just generally have a healthier business, a healthier profitability engine.
Boy, if when I was at 13 million, if I was still at 20% net profit, imagine how much more robust my cushion or buffer would be than being a third that much.
Matt Horine: I think that hits the nail on the head for, for manufacturers aptly describe it as like a more money, more problems kind of thing. You're doing three X the work and suffering through kind of this shrinking profit margin, which manufacturers have been hit on the head with [00:09:00] over the past couple of years, I think.
You said it, the labor market, reshoring pressures, tariffs, anything and everything comes at manufacturers all the time, and you've got the five profit killers pretty well defined and talking through that growth trap a little bit. But something that specifically I get a lot from manufacturers is selling work that doesn't pay, which I think resonates strongly with our listeners because manufacturers chase volume, and then it creates all kinds of those problems.
That's something we've seen a lot on the show. Can you tell us a little bit more about that one?
Ben Hansen: There's a lot to unpack there. You see it so much in the construction industry where people feel that they have a fixed set of costs, a bunch of people on salary that they have to, quote, "keep busy," and they'll accept jobs that are neutral and sometimes slightly negative with this logic that I need to keep my team busy, right?
When you sell work that costs you money, it's taping a hundred dollar bill to every or- not just every order that [00:10:00] goes out, every item on every pallet that goes out, right? And so there's a couple of parts there. There, there are absolutely certain kinds of businesses where you need to have a certain scale to be even effective or a player in the game.
So sometimes maybe you need X million in revenue to even be in the game, and you know that getting there, you're gonna be losing money. That's a little bit of a side situation here. We're gonna put that case to the side. We're gonna assume that, that let's say you're a smaller manufacturer at ten million dollars a year and you have been profitable, but now you're either chasing revenue to maintain that or to, let's say, get to fifteen million a year in revenue, right?
What I see all the time is if five years ago when you were at five million you were profitable, and let's say today at ten million you're less profitable, if you're thinking that if I only got to twelve or fifteen million I'd be profitable, you gotta [00:11:00] scratch your head. If the last five million in growth was ultimately margin and profit negative Why is the next X million going to change that?
You can't sell your way out of a profit problem. If your business model is not right, if your pricing, so your economics are not correct or not profitable, just more revenue is likely not gonna solve that problem. But it's very tempting to sell your way out of the problem. A rising tide lifts all boats.
Revenue cures all. I can't remember who is so pr- who, who's so well known with that phrase. But if you are taping $100 bills to those items as they go out in pallets, it's not g- it's not gonna dig you out. It's gonna dig you deeper.
Matt Horine: First thing that came to mind as you were talking through that was the old adage that revenue cures all.
It's something that we've all heard probably in our careers. In a lot of ways it does in the terms of personal performance as people are going through and working their jobs. But you also hit on something there that I think is [00:12:00] really a common question in the manufacturing space, the revenue range where people are looking from anywhere from five to 50, but also that $10 million to $15 million, uh, sweet spot.
95% of the manufacturing sector is small business, family-led, fam- founder-led, family-owned. You've hinted at it there, but are there a lot of common blind spots in founder-led or family-owned manufacturing businesses that you see where this problem occurs most often?
Ben Hansen: I'll tell you what I see so frequently in, I'm gonna call it blue collar style businesses, and that's not to say that everybody in manufacturing is, quote, blue collar.
But I think so much in manufacturing, the people who run and own these maybe smaller manufacturing businesses, their background is, ta, manufacturing. And by that, maybe on the floor, working their way up, been around the business so long. Here's like a classic example. The person who was [00:13:00] either the best sales rep or the best engineer in their old company Then decides, hey, I'm gonna have my own company, right?
But being a great salesperson or a great manufacturing leader, I'll take the word leader back, a great technical person in manufacturing doesn't necessarily make you great at the business side of it. So very commonly, imagine your dad was a plumber, you became a plumber, you were so good at it, now you've got a plumbing company with 30 trucks, and you're doing $15 million a year.
What about that story, like guarantees that you're great at managing a P&L, managing expenses, dialing in pricing, cost optimization? Not necessarily the case. Now, that's not to say that self-made plumbers or self-made manufacturers are not sophisticated at that. We see a third being really gifted at the profitability, a third about [00:14:00] average, and a third kind of in that lagging, you know, that lagging chunk there, that's often really suffering on some of those business elements.
And so, that's a lot of who we're working with, those second two groups, trying to help them claw their way up into that top group that's really executing well with profitability.
Matt Horine: Yeah, you define that really well because it is a lot of what we see in the manufacturing sector. They're really good at manufacturing.
The engineer example is something that's really great, by the way, because you've seen a lot of folks who know products backwards and forwards, know the customer market, kinda transition into a leadership role. It does take on a different nature, where you're looking at more things on the cash flow, the balance sheet, all of those types of ins and outs of running the business, which ultimately the goal is for growth, right?
So the people are looking at this as a, "I run my business just fine," it's do you wanna take that next step? Certainly something in there for everyone to dig into. I wanna also kinda transition to talking about the Profit 180 program and a few of the key details that we discussed w- when we met [00:15:00] was specifically addressing things like utilization, converting fixed costs into Veryable ones to adapt to demand fluctuations.
That's essentially the core thesis of what we do at Veryable on the operational side. How often do you find that labor structure is the primary culprit when a manufacturer has some of these symptoms that you're talking about?
Ben Hansen: I wanted to go back to what I was saying about construction, when I said a lot of times people are working to ke- you know, taking jobs to keep their crews busy.
And then I wanna kinda link that to manufacturing. And what I would say is that manufacturing has probably a much heavier share of their costs or P&L or budget in property, plant, and equipment. Also, of course, labor is a big bucket. So you touched on labor, 'cause I know your company, Veryable, very dialed in to having that kinda Veryable dial, if you will, with labor But I think two parts there.
If you're in manufacturing, if you've got, we'll just make it up, $10 [00:16:00] million of property, plant, and equipment that's financed, so you've got a, an annual cost, let's just say, of a million and a half with some kinda depreciation and finance charges, arguably you need to sell a certain amount to make that PPE and depreciation expense, mush it down into, I don't know, 10, 20, 30% of your P&L there.
But the same thing about labor, right? So if you've got labor as normally, let's just say, 30% of your cost structure, if tho- if that labor is fixed and demand goes down or revenue goes down... Too bad you can't see my hands flying on the video here. But I guess what I'm suggesting is if every month, if you sell a million dollars, if your fixed cost and your labor cost, the fixed part Equals 600,000, and that allows you to be decently profitable, right?
If your revenue then goes down, let's say, for the next six months from a million to 800,000, [00:17:00] you're getting squeezed if you can't also dial down your cost for both labor and property, plant, and equipment, and debt, and things like that. And so the idea there is if you have a lot of variability in your demand, you probably...
is one of the things that we teach people, you wanna have variability in your cost structure, at least to some extent, so that you can dial down your cost to maybe match your revenue during that period. 'Cause what we see so often, and I've actually got a module in my course called No Bad Months, and the idea is how to avoid bad months.
We s- we see so often in businesses of this size where the demand month to month changes a lot, and when you have, quote, "a good month," you have a good month in demand, it feels like you've got a great month on your P&L. And maybe out of the course of a year, let's say you've got three great [00:18:00] months and you're bringing home 15% net profit, and then you've got six medium months and you're keeping five, let's just say, and then you've got three bad months, and you give half or all of it away.
If you had known that those bad months were coming with at least a little bit, or once they are upon you, you shorten the time for them to stop being bad months in a row. Instead of six bad months in a row, it's three if you can act more quickly. Generally, the way to act more quickly, obviously, if you could sell your way out of it, great, but in many cases, to, to turn your cost structure down.
And so in, in manufacturing, if you've got some expensive equipment you're paying for over five years, it's gonna be harder to turn that one down. But if you had a chunk of your labor force that was Veryable, you might be able to dial that down. In fact, when I used to be in the staffing and consulting business, I felt that a large reason why people hired consultants for us [00:19:00] is if there was a dip in demand, they could look at their labor force in three buckets.
They had their FTE full-time people, which were the least rapid that they could dial down if they needed to or reallocate Then they had two buckets that were pretty Veryable. One was like my folks, so they could just not renew your contract, or they could honestly cancel your contract early. And we knew we were providing flexibility, and the people who took on that work knew that they were trading some things off, and one of the costs was your contract could end in a month instead of something else.
And then the other one was my customer would subcontract big chunks of work into a fixed scope of work to another kind of supplier. So it was like a subcontractor maybe making a subassembly. You could look at a subassembly in one way as it's a part. Another way you could look at it is variabilizing some of your labor.
Anyway, so my point of that is, if you have the [00:20:00] ability to quickly scale up in some kind of Veryable nature when there's more demand, without absorbing more long-term fixed cost, and scale down when there's a bit of a dip in demand, you can avoid a lot of those troughs or having a bad month. Wouldn't it be great if, let's say, next month you had 80% the demand?
Instead of losing money, you just made 80% as much instead of 100%, right? And that's kinda what I'm talking about. I think that's what you're talking about, which is, how do you have Veryable costs, at least in part, so that if demand dips a little bit, you don't go real negative on your profitability?
Matt Horine: Yeah.
Spot on. I think that's a lot of what we see every day, especially with manufacturing. To another side of that equation, cash flow comes up constantly in our conversations with manufacturers right now. It's probably topic number one, if I had to grade it. It's kinda ar- that's arbitrary. I don't know if you know of no official survey, but it is almost a daily [00:21:00] conversation that we have.
There's actually a really compelling capital expenditure opportunity available right now. There's accelerated depreciation, but companies are sitting on the sidelines because they don't have the cash throughput to make that kind of move. Is there a direct line from fixing profititis to unlocking that kind of strategic capacity, or how do you see the cash flow portion of this?
Ben Hansen: I used to work at Dell Computer back around '98, '99, 2000, and Dell was well known as having a positive cash flow conversion cycle. That meant they collected money from customers before they paid suppliers for the parts that went into those computers, which was really cool, 'cause that meant that customers funded your growth and cash flow What we see most commonly in product and services businesses is that you are paying suppliers and your [00:22:00] people before customers are paying you.
And so that means that you are essentially the bank or floating your customer. And so you have, we'll call it, a negative cash flow conversion cycle, which means let's just say it takes two months to build stuff, and then you ship it, and then you send an invoice, and then you get paid 30 days later.
You're basically banking your customer 90 days. So what are some antidotes for that? The first one is having a higher net profit percentage or total contribution margin percentage. And I'll just give you a hard-to-follow math over the, over the, uh, through your ears rather than looking at it, but just work with me for a minute.
Let's pretend that your profitability is ten percent, and so if you sell a million dollars, you keep a hundred thousand. Okay? And let's say you have to float a [00:23:00] million dollars to get started. Theoretically, you'd get all that money back in ten months. But if you were twice as profitable, twenty percent, you'd be keeping two hundred thousand a month instead of a hundred.
You'd get your cash back in five months. Or conversely, if you went down to five percent instead as ten percent, it would take you twenty months to recoup that million. And so while it's hard to see my hands and the math and the charts in an audible way, what I'm trying to say is if you are twice as profitable on a percentage basis in terms of your total net margin, your cash flow challenges would be cut in half.
Your break-even timeline would be cut in half. So the more profitable you are, the less of a cash flow problem you have. You might be saying duh, but it'd be really interesting to map that out. Separately, another big tool is what I call payment terms and billing and invoicing and how [00:24:00] people do that. Very frequently, doing things like charging a deposit to get started, a payment upfront Milestone invoicing.
These are... And then n-negotiating in a different way. I think for many people, net 30 payment terms, a lot of people who are maybe a little less formally educated on some of this payment terms and cash flow and whatever, they've just always seen net 30, and they think it came down off the mountain on these stone tablets.
Net 30 is like a fiction, but some people treat it like a fact. Who's to say you couldn't take a deposit? Who's to say you couldn't do COD or net zero? So many customers, they don't think about your invoice or paying you... Sorry. They don't think about paying you until they get an invoice. So come up with 10 ways to get them an invoice faster, right?
And I'll just tell you a page out of my book. I knew that my customer [00:25:00] paid net 10 from when they got the invoice. So what a lot of my competitors would do is th- they would bill by the month, and their consultants would fill out a time card. And if they worked that day, they, let's just say they put in X number of hours.
Let's pretend it's eight. They waited till the end of the month. Then they browbeat their consultants to get their time cards in. Then they sent those time cards to accounting. Then they browbeat accounting to get the time cards reconciled and invoices out, and then they sent the invoices out. So by the time the, the last of the month, the 30th, let's say it took a week to get the time cards and then a week to get the invoices out, and then they sent the invoices.
So now it's like the end of the month plus 10 or plus 14 before the invoice goes out. And then that customer is on net whatever. In our case, it happened to be net 10. That's its own story. But that means you're not getting paid till the month is over plus 20 days I'm like, "Let's totally redo that. Hey, [00:26:00] Mr.
Customer, we have a contract with you for, let's just say, $200,000 for this piece of work. I'm gonna bill you $16,666.67 every month for the next 12 months. Sometime we're gonna have a little overtime, sometime we're gonna have a little under time. But so that you can nail your budget, we're just gonna bill you the same every month, and I'm gonna bill you on the 12th of the current month so that you can pay me on the 22nd of the current month."
So what I did there is, instead of getting paid on the 24th of the next month, I got paid on the 22nd of the month that I'm incurring the expenses. So I basically floated one payroll, one 15-day payroll to my team, rather than three 15-day payrolls. So I cut my cashflow need by basically two-thirds by restructuring how I billed, how I paid, and how I did my [00:27:00] invoicing, and there's just one example.
But my point of that is my customer mostly was, like, big companies like Microsoft, Nordstrom, and T-Mobile, and they just paid you how procurement decided they were gonna pay you. But there was some wiggle room in there, like when could I send the invoice? They didn't tell me when I could send the invoice.
They told me when they would pay the invoice after they got it. So I figured out, how could I send them an invoice 30 days sooner?
Matt Horine: Yeah. Though that's a really interesting cycle because the compression on that is something that I think small, mid-size manufacturers could hear a lot more of. I... You were talking about that, and I recalled a story early in my career at another startup where we had acquired a large customer who was a public utility on the West Coast, very large, and they had basically forced payment discount terms.
So if they paid somewhere within the 10, net 10, they would take a discount of 1% to 2%. And it was pretty aggressive for a small business like ours because [00:28:00] they would just pay it early. It was a small invoice. They would do it, and it would hit you in the pocketbook a little bit. But on the flip side of that, taking that lesson forward, it's most companies are agreeable to adjustable payment terms.
It's something that you just don't think of. It's leaves the dock, and then they get the invoice a week later. You're waiting on work that was done upwards of 30 to 45 days ago, so a really good example.
Ben Hansen: And even Dell, back in the way-- To get back to that story, they didn't bill you when you got the computer.
They billed you when they took the order And again, another five to 10, 15 days, but they were working the system on both ends. And then of course, they're a big supplier or big customer of these equipment suppliers. They'd beat them up for 60-day payment terms and stuff. But my point of all that is if you're a $10 million manufacturer, there's both ends, right?
There's what can you do on your customer side? What can you do on your supplier side? But a big one that I think a lot of people kind of overlook is what are your [00:29:00] internal operations on how quickly can you get the invoice out? Could you get the... Who... What would it take to just send the same dang invoice seven days sooner?
I don't know what that means. I don't know if it's like an estimate followed later by a true up. So when I used to work at Microsoft, we did a lot of large enterprise software deals. So let's say you're Microsoft and you're selling to Caterpillar, right? If we're gonna sell you a site license for your, let's just make it up, forty-five thousand worldwide employees, we're not gonna ask you every month how many employees you have and then bill you whatever it is, $72 per person to calculate your site license.
We're gonna estimate in the beginning of the year What 45,000 times, let's say 100 bucks a month or whatever it is, and then we're gonna start billing you on some cycle, and then somewhere later on down the road, if you had fewer employees or more employees, [00:30:00] we'll do like a catch-up payment or credit. Why?
So that we can send you that dang invoice sooner so that you can pay sooner so that you stretch us out less. So again, if you're sending out pallets of the favorite widgets, I've never actually seen a real widget, the mythical product, right? If I expect to send you 100 widgets a week, who's to say that we need to wait until we really know that it was 90 that week or month to then calculate later to send you the invoice?
Maybe I could send you the invoice right now for the next month, or every time the pallet leaves, I send it right then, and then if we find out later it was 90 or 110 instead of 100, we add a credit or a debit to the next bill. That's not a recommendation on, like, how to execute that. That's more a recommendation on how, I hate to use the word creative, but how much sooner can you send your invoices?
Because people are [00:31:00] doing what... People are paying you based on an invoice hitting their inbox or their payment system. The relationship of when that invoice hits to when things in the world happen is sometimes a lot looser than you might expect.
Matt Horine: Yeah, that's something that a lot of people need to take into consideration.
I can think of a few times I've been in a manufacturing environment where this would've made a lot more sense. And to your point, the prescription's right there to fix that. I wanna broaden this out a little bit before we get into some of those more prescriptive fixes actually look like. We talk a lot on this show about reindustrialization, the return of domestic manufacturing capacity, reshoring, the build-out of the defense industrial base, and new entrants standing up operations in the US for the first time.
What you're describing sounds a lot like a prerequisite for running these types of operations, people taking risks and bringing it back onshore. And you said something in our prior conversation that's, that stuck with me. Better profitability and better cash flow is the best risk management a manufacturer can have.
If tariffs spike, if a [00:32:00] machine breaks, if there's a gap in supply chain, the companies that weather those shocks have margin, and the ones that don't get forced into bad decisions. Can you quantify that and put a number on that, and what does a meaningful net profitability position actually look like as a buffer?
Ben Hansen: Let's unpack that. There's a couple things. We touched on earlier in the show the idea that having more profitability, more margin, more contribution margin, more net profitability as a percentage gives you a lot more buffer when things go sideways. I think that's true. You were asking me maybe how to quantify some of that.
To unpack that, what I also see very often is owners of smaller businesses muddy the waters on how they get paid versus how the company has net profitability. So let's take an example. I had a client, three million dollar company, and they're very excited. They were taking home something like four hundred and fifty thousand dollars a year, [00:33:00] and they're like, "Woohoo, we are at fifteen percent net profitability."
And I'm like, "You own the company. You work in the company full-time. What's your salary?" And she said, "Thirty-six thousand dollars a year." And I'm like, "How much would it cost you to pay somebody as good as you to do as good of a job?" And that number's a hundred and thirty-six, a hundred and eighty-six, two something, whatever.
And you're like, "Gosh, if you paid yourself a hundred thousand more..." I think about a hundred and fifty thousand more is what we agreed on in that case. Your company, like, your salary would be paid, but then the company, instead of earning theoretically four fifty, would've been down to three hundred, which was basically taking that number from fifteen percent net profit down to ten.
And what I'm bringing up here is I would say that a ten percent net profit after all the dust is settled and accounting for any [00:34:00] equity holders who are getting paid by distribution instead of salary to get, quote, 'a fair salary.' Now, I'm not saying you need to pay it as a salary. You could maybe pay it out of distributions.
By the way, my lawyer wants you to know that I'm not an accountant, not in charge of your taxes or the IRS. But my point of that is what... Even if she didn't take it as a salary, she, quote, "should have assumed" that out of the bottom line net profitability, let's say a hundred and fifty thousand was really her salary.
So that means she should get, quote, "paid," or at least accounted for in her mind what her real salary was for being the CEO and a full-time senior level leader, manager of the company, and then separately, what the company is generating, right? So if you've got that fifty million dollar manufacturing company and you're thinking about selling to private equity, I guarantee the, maybe not the first thing, one of the first things [00:35:00] private equity would do in evaluating the value of your company is to see what is it gonna take to replace the current equity o-equity owners who are working in the business with, like, regular employees that they would have to go hire on the open market.
So if it's a family business and it's you, your brother, your sister, and your dad, and you guys are making crap salaries, but taking it out of distribution And it would cost you $250,000 each to replace your zero, your tiny salary with somebody off the open market. Four times 250 is a million. They would likely reduce your bottom line net income by a million to account for those salaries.
So I re- recommend that you might do that in your head, and then see what's left, and compare that to our 10% benchmark, which means, like, 100,000 per million. So after you're [00:36:00] paying those people the right salary, whether it's actually W-2 salary or kind of a calculation from the net income, and then what's left?
Are you keeping 100,000 per million or 10%? That would probably be a baseline to say that you're somewhere in the neighborhood of average, and less than that is gonna be below average. Hello, Profititis town. Or better than 10%, now you're starting to get into the rarer air. And every market's a little bit different, but as we start getting up to 15, 20%, that might be, like, the top quartile of profitability for that space.
Matt Horine: No, you hit on a lot of really big notes there for people who are trying to make decisions about reshoring or bringing things back, and one of the things that I caught in that, too, is some of the institutional knowledge and expertise that goes with the business. Quantifying that could be very tricky, not just from a salary perspective, but how much institutional knowledge is there as well.
So let's get into the actual cure for this. You have a [00:37:00] four-step profit prescription, and I know you've described potentially doubling profitability as part of that. A very bold claim, but very believable because this is really just getting down to numbers. Can you walk our operators through a high-level overview of the four-step profit prescription and what does 90 days actually look like in practice?
Ben Hansen: So I wanna get into the profit prescription in just one second. First, I wanna unpack the double your profitability. Our baseline performance, if you will, guarantee with the clients that we accept is to increase their net profitability by 5%. Very commonly, we even help them increase their profitability by 10 points or more.
So that is another 50 to 100,000 of net income per million of revenue. Not to get too mathy there, but a lot of times we're taking on clients in the low single digits of profitability, so five million in revenue translating something to two, three, $400,000 a year [00:38:00] in net income, and we typically allow them to double that.
We only offer that guarantee to people that we know we can be successful with. That's how we're su- that's how we are able to deliver on that. Now, what is the profit prescription? There's basically four parts to that. One is the mindset and the profit psychology about focusing on profitability. It sounds sometimes silly in the telling, but in the doing, we see very commonly that people who are really challenged with profitability are exhibiting profititis, are so dang focused on revenue, firefighting, fixing operational problems, that they're not really spending a lot of time, energy, and priority on profitability.
So if you're not working on it, you're likely not gonna have great result there. So the first is to kinda unpack that, show them that, give them some tips, tools, tricks on how to work on that, and kinda build that in to the fabric of who [00:39:00] they are and how they manage their work The second thing we call our profit accelerator phase is where we show them literally how to optimize profitability or optimize for profitability around key elements of the company.
Who are their customers? What do they make and sell? Who is their team and how are they paying them? How are they working with subcontractors? Some core fundamental things like that. Then we have a third phase, which we call our profit CFO, like chief financial officer. In many cases, small to mid-size companies, again, if you're more self-taught, monthly financial review, A, there might not be one, B, it might be really loosey-goosey, and C, a lot of times our founders and many folks on the leadership are not like superstars at reading through those financial reports, really understanding, being able to use them to optimize, avoid [00:40:00] bad months, and really maximize their profitability.
So we show them how to simplify and make much more digestible those financial reports, give them a lot of skills and confidence so that they can look at that and help manage their business to better profitability, and it's also in that module that we really dive into things like pricing, discounting, customer terms, cash flow conversion cycles, collections, inventory management, some of those kind of things.
And then the fourth area, which sometimes is the most fun, is what we call profit growth. So once you've identified and kinda cleaned up your business and profit model, so let's just say you're m- you've moved from three percent net profitability to eight or thirteen percent net profitability, then we show you how to grow the most profitable parts of that business.
And I'll just say that it's likely that if you're operating at ten [00:41:00] percent net profitability all up It's likely that a third of your business, I'll tell you a story about this in a second, is, is pretty low margin, maybe even negative. A third of your business might be 5 to 10 to 15% net margin, and a third might be 10 to 15, 20, 25% net margin.
So the question is, why grow the worst stuff when you could cut it, which is what we work on in Profit Accelerator. But then in profit growth, we wanna grow that top third of what you do. Let me share with you a story. I was working with about a $90 million, when I started, and about $110 million when I stopped working with them, uh, manufacturer of construction-related materials, and then they were also a subcontractor to install those materials.
Very similar to manufacturing. They did have a manufacturing plant, but it was more like feeding the construction side. And so we looked at all their work. We called it Operation Dog [00:42:00] Catcher, which is how you op- you know, to optimize your customer and project base. And we realized that the top quarter of work they had done over the last two years was literally responsible for all of the profitability that they had over those two years.
And you're like, "Wow, interesting." And then the middle chunk was also responsible for 100% of all the profitability that they had. And for those of you who are math, I know that's a percent there. But the bottom quarter of the work that they had done cost them the same amount as their total net profitability.
So one way to look at that is 75%, the bottom quarter and the middle, they had done all that work over the last two years basically for free, and it was only the top quartile quarter, 25%, of the work they had done that was really putting money in their pockets [00:43:00] And so when you think of our profit formula, first we...
That psychology is to start looking at things like I just described. The accelerator is how to cut that bottom quartile as fast as possible. Then the third part, which is our profit CFO, is to really start putting numbers to that, and then looking at some of those financial levers, pricing, tools, cash flow, invoicing, collections, inventory, stuff like that.
And then the fourth part is how do we grow that top quartile where there's really a lot more profitability? So that is the four-step breakdown, or not breakdown, the four-point plan, which is the psychology to focus on profitability, the quick acceleration to, to improve profitability by not doing the things that are not working well across suppliers, products, your payroll and labor, subcontractors and suppliers, that sort of thing.
Then looking at the [00:44:00] numbers differently, making them easier, making them help you. Then the last part is to double down on your sweet spots that you're doing really well in.
Matt Horine: But you s- you hit something that was really important there, because it is psychology. I think the profit question versus that top line growth, we hear a lot about top line growth.
So before I let you go, and this has been an excellent show, we always close the show with this question, and I ask because our operators, or our audience are operators, they, they look for this kind of advice. And so I, I wouldn't call it necessarily free advice, but something you would recommend to do today.
For a manufacturer listening to this right now, maybe running a $10 million operation, maybe feeling like the revenue is there, but the margin isn't showing up the way that they would like, what's the one thing they can do in the next 30 days to start diagnosing whether they have profititis?
Ben Hansen: You know, not to make a bad reference to Alcoholics Anonymous, but I think that the first step is knowing that you have a problem.
That would probably be the biggest... It sounds a little bit like a cop-out, but if [00:45:00] you're spending 110% of all your time and cycles focusing on revenue, firefighting, and operations, where is the 10 to 20% of your time? And 10% of a 40-hour work week is four hours, let's just say. Do you have even two to four hours blocked into your calendar to directly tackle profitability?
I have a tool or a concept that we call Money Mondays, and just think of money- Monday being a bit metaphorical. It could certainly be on Thursday, for example. But I would love for every owner operator to, at a absolute bare minimum, book two hours a week on their calendar. One hour with your leadership team, one hour with just yourself, and maybe an accountability buddy to make sure that you're on it instead of doing all the other junk that's screaming for your attention, and really think, "I'm gonna laser focus those two [00:46:00] hours on profitability, not revenue."
So how could we increase pricing? How could we reduce discounting? How could we collect faster? How could we stop doing things that are costing us money? How could we optimize and shift towards things that are higher return, higher value, higher profitability? So I would say Money Mondays is the absolute number one foundational thing.
Do you have some time locked into your calendar and that of your leadership team, again, not to focus on revenue and growth, not to focus on operations or firefighting. And it's a fair answer to say that if processes are broken, it's costing you money. I get it, but I'm pretty sure that you're gonna s- be spending a lot of time working on those things already.
But I will say, if you don't have two, four hours a week you and your leadership dial in on the profit side, you're probably not fixing some of those broken economics.
Matt Horine: Excellent advice. No, that makes a lot of [00:47:00] sense. You've gotta take the time to plan for it and, like you said, identify that there is a problem.
You also have a, a tool, a profit leakage detector on your site. It looks like a great resource for our audience if they wanted to do a, an assessment.
Ben Hansen: So it's www.profitdoctor.com/leaks, L-E-A-K-S, like- Profit leaking out of your bucket. It's a very powerful tool to help assess through the 10 areas we see most commonly where businesses are losing money, which of those 10 may be a problem for you, which are the worst problems, and therefore, which are maybe the best opportunities to tackle first.
I definitely invite anybody to download that and take a look at that. In the email that comes as part of the download package in the sequence there, there's some videos that kind of show you a little bit better how to work it, and there's also, I'm sure, like, a link where you could maybe book a little bit of time with [00:48:00] us, and we could help you evaluate if you got any questions or got stuck on anything.
I think very powerful. Certainly one of the most powerful first steps is knowing you have a problem, knowing where that problem is and how bad it is, and that can really triage your effort and focus you on the most important thing first.
Matt Horine: Excellent. Ben, this has been a great conversation, and I know you mentioned your website there, but where can our listeners go to learn more about you and, and the Profit Doctor?
Ben Hansen: Yeah, I know it sounds corny these days to send somebody to your website, but it doesn't suck, and it does explain some stuff. There's a tab for some resources. There's a tab to get some help. Explains what we do. You can see some real live customers who we've helped get 5, 10, even literally 20 percentage points of enhanced profitability.
That's basically the worst shall be first kind of thing. People who are really struggling, and then helping them turn that business around, and honestly, that's why I do what I [00:49:00] do. It's fun and interesting and a challenge to help somebody who's already crushing it do a little bit more, but I take so much more satisfaction in helping somebody who's really struggling and turn that business from really basically net negative in terms of profitability, surviving on debt and old PPP and EIDL loans, to, like, really a core strength for themselves and the business and their families.
That is really what excites me. So go to the website. I'm sure it'll be in the show notes, and I don't know if there are show notes, but profit like money and doctor, D-O-C-T-O-R, .com.
Matt Horine: Excellent. Ben, this has been very insightful. Great resources, and we really appreciate you joining us today.
Ben Hansen: Cool. Thanks, Matt.
Matt Horine: To every operator listening, the question Ben is asking is really simple.
If your last million in revenue didn't bring more profit, what makes you think the next one will? That's not a growth problem, it's a systems problem. From this conversation, it's very fixable.
Matt Horine: To stay ahead of the curve and to help plan your strategy, please check out our website at www.veryableops.com and under the resources section titled Trump 2.0, where you can see the framework around upcoming policies from the administration and how they will impact you as a manufacturer.
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