Transcription
All right, y'all. Today I am going to be going through the most important thing when it comes to understanding your business, and it is your profit and loss statement. I think that every founder, everyone who's in a leadership position at a company should know how to read this and do it in a way where it makes sense.
Um, I am going to be going through the easiest way, I think, to explain a P&L or a profit and loss statement to you guys. And I think the value you're going to get out of this is massive. If you guys do not know who I am, my name is Dominic Iavone. I am the CEO of a 10-figure brand portfolio. Yes, a billion-dollar brand portfolio between Raw Nutrition, Bum Energy, 3D Energy, Onside, Relive Health. Those are all my companies. And I've been uh blessed to be the founder CEO of those companies for quite some time. So, I know how to read service-based P&Ls. I know how to read CPG P&Ls. And I can do it in a way where I don't need to explain it to be confusing. I think we'll see.
The reason why I've decided to start doing these education videos is because I do have a newsletter that goes out on a weekly basis. And this was by far the most liked and responded and thanked email newsletter that we've received. So, I'm going to dive right into it. And the first part of this is how to properly read your P&L and to do it in a way that makes sense, that's easy, and you don't need a [ __ ] degree in neurosychology to do it.
The stress nobody talks about is when your business is doing really well, but at the end of the month there's no money or there's no more money than you thought from traditional before. So, for example, you do an extra $100,000 in sales, but that doesn't translate to the bottom line. That is a big problem, and this is a way that we're going to solve it and show you how to look for it.
Most founders are only seeing about 20% of what their P&L is actually telling them. And your P&L is your report card. It tells you where to spend less, where to invest more, and where to move money around to make you actually put money in your pocket or in your bank account at the end of the month. What your P&L shows you, it shows you your topline revenue, it shows you the middle expenses, and it shows you your bottom line, what's left over. You're going to hear me use words in terms like CM1, CM2, CM3, SGNA, and things like that. And as I go through those terms, I'm going to absolutely explain them to you. But I will be using those terms a lot throughout this video and you will absolutely understand what they mean.
Okay, here we go. So, this is a perfect example of a P&L. If you look at this P&L, you'll see on the right side of this P&L that I've replaced all of the monetary values with percentages. I did that one to cover up what the P&L actually showed because it's actually a real P&L. And two, because I think one of the best ways to look at P&Ls is with percentages. Obviously in your P&L ideally to the left of these percentages you would want to see the actual number and then to the right of that the percentage to topline revenue. So taking your topline revenue being 100% every line item underneath that should be a percentage of that topline revenue. So if you look here you'll see my 21.2% that 21.2% is of the 100% topline revenue.
I talked to you guys about why I like dollars more than percent because percentages turn numbers into signals. Now, what I mean by that is as your business grows, your numbers are going to grow as well. But the difference is is if I look at month over month over month over month, I want to see certain line items on my P&L stay the same percent. And then I also want to see some of my line items on my P&L go up. For example, if I'm growing the company, I'm going to have to bring on new staff, right? SGNA. So, as that topline revenue creeps up, you should see your SGNA creep up. But if those two numbers are correlated properly, the percentage should stay the same across your P&L. So, those are things that I enjoy using percentages for because if I don't do that, then numbers look bigger and bigger and bigger, but in quite literal, the percentage would be the same across the board.
The three numbers that tell you everything, CM1, CM2, and CM3. CM1 is the simplest to understand. CM1 is your cost of goods including inbound freight. So basically what you sell minus the cost of goods including inbound freight. That's what your CM1 is. Your CM2 includes outbound freight to the consumer or to the retailer as well as marketing expenses. And then your CM3 which is basically IBIDA uh is going to be what you actually put in your pocket. Now, there are certain things. It's earnings before trust, interest, taxes, all of those things fall into IBIDA. But ultimately, CM3 and Ibida can quite literally be interchanged as long as you don't have massive loans out that you're paying high interest rates on.
Is my product healthy? So, what I will tell you guys is if you have a bad CM1, which is your cost of goods, including inbound freight, if you have a bad CM1 margin, the rest of your P&L doesn't even matter because it's going to be damn near impossible to make money if you're not making enough money on this line item. Rule of thumb for myself, I like to see a net CM1 of 50%. That's a great healthy CM1 for an average business. I love to see that. A net CM1 also includes trade spend. We're going to get into trade spend in a different video because trade spend is actually not on your P&L. If you look at your P&L from any basis, at least my P&L starts with net revenue. What your trade spend is bucketed in is above that. So you have gross revenue minus trade spend equals net revenue. And then net revenue is usually where a P&L starts. So that trade spend area that sits above is usually not included in the P&L, but there's also usually the most amount of improvement in that space. So I have this here for a reason. We will do an entire video on trade spend. We want a healthy CM1. That number is 50%. Why is it 50%? That's just the number that I've seen to have the ability to get 20% to the bottom, which is a very healthy IBIDA margin.
Why buyers look at CM1? Perfect example, Road Haley Bieber's brand didund $100 million in topline revenue with a 10x multiple because the CM1 was 90%. Now, what you need to understand when you're dealing with a business or when you're going to sell your business is most people don't care about how you run it because they're going to probably run it differently unless you're really, really good at what you do. What they care about is how much you can sell and how much it costs for you to get your product. And everything underneath that is pretty much them coming in and trying to do it better than you to improve that. So, again, CM1 is very, very, very important when you're dealing with a business. 91% CM1 is absolutely insane. The reason why her CM1 was so high is because the business was mainly direct to consumer. Direct to consumer obviously gives you the best margin on your product.
CM1 benchmarks and levers. You'll see here it says 45% healthy CM1. I would say 50. 45 is still good in my opinion, but the ways that you can fix this very quickly is you can renegotiate supplier agreements to get better cost of goods. You can reduce your inbound freight costs by being more efficient. Maybe even moving your warehouse to a place where it makes more sense to ship to. or you shift into higher product margin goods, right? For example, in my world, protein is a horrible CM1, but I have other SKs that bring that CM1 up for a blended CM1 of above 50%.
CM2, CM2 is basically all of your marketing spend on top of your outbound freight. So, this is paid media, influencers, content, email, agency fees, commissions. This is where a lot of money disappears in CPG businesses, really in any business. Let's be honest, we're all marketing companies. We're just trying to figure out how to sell a product and how we can put our spin on it to make it cool, right? This is where you do that.
CM2 in action. I actually just gave you guys this perfect example two seconds ago. So, protein we have almost no margin on, right? It's absolutely exploding in cost and we're trying to figure out a way to be able to sell it in a way where it makes sense for us. Pre-workout and creatine, massive margins, great profitability. So, what are we doing? We're pulling all of our ad spend away from protein and putting it into the products that make sense, for example, creatine pre-workout. And then what do we do? We retarget those consumers on the back end with a much more cost-effective way to get them, which is through email and SMS. So, it's a great way to do a an actual programmed audit. And I did that and I noticed that we are not able to do the things we used to do on protein because that cost of goods has gone up so much now. It's just not possible to do what we used to. We need to continue to make sure that our CM2 number makes sense.
Important note on marketing. When you have agencies that that fee, right, those agency fees, the ad spends, all of those things are going to live in CM2. Now, when you bring these things in-house and they turn into salaries, that's what we would bring into what we call SGNA. SGNA is your in-house salaries, your media buyers, your designers, your all of all the people who are on a salary are going to live in that SGNA expense. So, as you're doing this and as you're building out and you're using agencies for marketing, like myself, I tend to realize that I want to bring people inhouse versus paying these outside agencies, when you do that, the line item will shift from a CM2 to a CM3.
All right, CM3, is the business actually profitable? We kind of went over this, right? CM3 and Iba are very much interchanged. The only difference is those few things that I told you about. Uh, it's earnings before interest, trust, and a couple other things that I don't remember right now. But this is the ultimate idea of what you're looking at, right? You have everything in CM3. You have marketing spend, you have SGNA and overhead, you have COGS on freight, you have outbound freight, inbound freight, everything. So, this is a real true testament to what the business is actually making. Unless, again, you have a very, very high interest loan that you're paying. You can definitely do an adjustment on your IBIDA for that. And you can obviously use that when you're going to sell the company.
Why CM3 matters? Because it's real. revenue can be misled. CM3 is the truth or the closest thing that hits your bank account. And another thing that's very important about this is some PE groups when you're going to sell your company will base the multiplier on what your IBIDA percentage is. So for example, anything under a 10% IBIDA may not give you the same evaluation or multiple as a business that you're getting a 15 to a 20 time or 15 to 20% IBIDA. So for example, I've seen that companies that come in at a 10% IBIDA may get a 7 to an 8 multiple and then companies at a 15 to 20% IBIDA could get a 15 to 20 multiple. So do that math in your head and realize how much of a difference that means on an exit. It's millions of dollars, hundreds of millions of dollars if you're big enough.
So again, CM3 benchmarks, 10% is not great. I don't love a 10% IBIDA. Target floor for me is a 15% and anything above a 30% is a problem. Would you rather be making 40% IBIDA on a $10 million business or 20% IBIDA on a $50 million business? The answer obviously is 20% IBIDA on a $50 million business. And this is the perfect example of explaining that if you are doing 30% IBIDA or 40% IBIDA, that's the time that you need to take that reinvest it into the company and then put it in those building blocks that you know are going to make sense. If you need to reinvest in inventory because you sell out, do it there. If you need to reinvest in marketing because you know you can keep driving new customer acquisition, put it there. But don't keep putting it in your pocket because the problem then comes to the fact that your business isn't going to grow. It's kind of just going to stay steady. So in my opinion, a healthy IBIDA is 20%. If you start to creep above that, try to do some reinvesting back into the business and to grow it. Now if that goes below, you need to readjust again and get back to that 20%.
How CM1, CM2, and CM3 work together. Again, you look at this in a big picture, right? Your CM3 is the big bubble. Your CM2 is that smaller bubble. Your CM3 is the absolute smallest money that you're bringing in. So, it is very, very important to pay attention to all of those.
Your monthly P&L audit. Format your P&L in percentages. I've told you that. I think it's a very, very valuable tool. I have all of my finance guys do this and report this way. So, that way I can pull and see if anything is off. pull five reports last month, two months ago, same month last year, full year prior, utilize them and flag anything that shifted more than two points. So if you have all these P&Ls next to each other, you're looking at them and your marketing is going from, you know, 5% of top line on the P&L to 10 to 20 to 30, but you're not seeing that translate to the bottom line, obviously, your marketing isn't working. You're overspending in marketing. So it's a great way for you to see that you're overspending without actually having to go into the nitty-gritty and look at the dollars. Ask three questions per flag. Was it expected? Was it on time? Do I need to fix it? Right? Did it make sense to do this? Check CM1, CM2, and CM3 again against your benchmarks. And benchmarks are usually a really healthy month. So go to your month where you had the best IBIDA, right around 20, 21, 22%. Use those benchmarks up as percentages and use those across all your other P&Ls. And that's where you'll see and start flagging those red flags across. I would also set a cadence where you're doing this monthly, quarterly, and annually. I'm at a point now in our company where we're so big where I actually get this weekly every Monday. I don't get an IBIDA. I get basically my CM1 and my net revenue. So my net revenue comes in. I see what my CM1 is. And because I know we run such a well-oiled machine here now. I have an idea of what all those others are going to be and I can almost bet on my EBA dot percentage by seeing those two things which took a very long time to do but that's where we're able to be now.
Step one, get your P&L in the right format. I just said this, right? I want you to have your bookkeeper, which should be able to deliver you a P&L very simply, have your dollars in revenue, and then next to your dollars on the right hand side, put the percentages compared to net. And that will help you again dissect all of this. Step two, pull the five reports. Step three, flag anything that shifted more than two points. Again, if you look here, COG's going from 36 to 39%. That's a problem. That's a big problem because that COG percentage could go straight to your bottom line. If you can fix that, you can literally take that money and go straight into Ebida with it. So again, very, very important to pay attention to your cost of goods. Marketing, again, going back to making sure if you're spending more on marketing, you're driving more topline revenue and you're bringing it to the bottom line. All of those percentages should remain true if you do that. If your marketing percentage goes up, that means that your top line didn't move with it and then you're delivering a lower bottom line. Again, a red flag. SGNA going from 12 to 15%. Usually, the only reason you grow an employee base is to grow revenue. You're not trying to bring more people on to do less, right? So, the idea is if you bring SGNA up, that SGNA should also flow to more topline revenue and more bottom line revenue, which should keep those percentages in line. If they don't, something is wrong. Audit it. Look at it. Figure it out.
All right. Step four. For every flag, ask three questions. What? Why did it do this? Can I get it back? And was it justified? Okay. Again, I kind of just went through all that with you. Step five, check your three margins. CM1, CM2, CM3. I gave you guys some healthy bullet points here, but ultimately I want you guys to pay attention. 45% and above is healthy. Your CM2 track monthly. Know your number. Watch for compression. CM3 is a 15 to 20% EBA target. Below 10% you are not doing good. Now granted, you have months where you can be willing to get this lower because you're trying to bring on new customer acquisition. For example, Black Friday is a perfect example of one of these months, but you want to make sure that you average the year out to end at a 20% IBIDA.
Step six, break it out by channel or product. This is when you get very, very detailed in a P&L. and I would love to see you get to this point, but for now, I think what you've learned today is very important. Ideally, what I do now and what I've do on a weekly basis is I have each individual section of my business broken down to show me my P&L by channel. So, Amazon, Target, Walmart, Sam's Club, Costco, Direct Consumer, Tik Tok. I can see every one of those channels and see which one is bringing me the most profitability to see where I need to keep reinvesting my money. That is a much much more complex thing to do and we can go through that over time. But for now, just understanding that that is a possibility is very very important.
That's really it guys. This is a very very simple way to break down a P&L and I hope you understand it and I hope you like it. I know I talk fast and I apologize for that. So if you need to slow this video down to get it, please do so. Um, and again, I like doing these videos because I do think there's so much value in understanding how to do this stuff on an entrepreneurial level, especially if you're starting out and you're just trying to figure out how to read a P&L and how to know your business is actually making money. This was the most popular email we sent out in our newsletter. If you guys do want to be a part of that newsletter, please click the link in the description. You can get it for free. It doesn't cost you guys anything. And these are all the tips, all the tricks, all the things that I do on a daily, weekly, monthly, yearly basis to grow my billion-dollar brand portfolio. Thanks for watching.