Scott Todd tackles the scaling trap that's secretly draining profits from growing businesses. When Brian, a home flipper with 8 years of experience, asks why he's taking home less money despite higher revenue, Scott reveals the hidden problem: margin erosion. As businesses scale, expenses often grow faster than revenue, creating the illusion of success while actually reducing profitability. Scott shares his proven three-step system for identifying and eliminating the "bad guys" in your financials using percentage-of-revenue analysis—the same method he uses to manage his own business.
What You'll Learn:
Why growing revenue doesn't automatically mean you're making more money
The scaling trap: how expenses creep up faster than sales as businesses grow
Why looking at whole dollar amounts on financial statements misleads you
The power of percentage-of-revenue analysis for spotting profit leaks
How to identify your biggest expense problem in under 30 minutes
The deep dive methodology for getting expenses back under control
Key Takeaways:
The Scaling Trap Reality: Every new sale at a lower margin means you're working harder for less—your revenue might grow 10% while expenses grow 12%, silently killing profitability
Percentage Over Dollars: Whole dollar amounts don't tell the story—percentage of revenue reveals the true villains in your business
The Three-Year Rule: Compare your current year to three years ago to spot margin erosion patterns (example: if cost of goods sold was 25% in 2022 and is 32% today, that 700 basis point change is your enemy)
One Bad Guy at a Time: Circle the biggest percentage increase first—trying to fix everything at once leads to fixing nothing
The Three Decision Framework: After your deep dive, you'll face three choices: cut costs, raise prices, or have an all-hands meeting to control spending
Monthly Vigilance: Review percentage-of-revenue statements every single month with your team—this is non-negotiable for business health
Welcome to Fix My Business. Today we have a viewer's question and it comes from Brian. Brian says, Scott, I have been running my home flipping business for eight years. Revenue is up, but I swear I'm personally taking home less than I did three years ago. My wife keeps asking me where all the money is going and I honestly don't know. I'm working harder than ever and I feel like I'm missing something obvious.
what's the first thing I should fix? So, Brian, brother, hear me out here. Listen to what's going on. What's happening is you're struggling with what I call the scaling trap. And the scaling trap occurs when every new sale that you have is coming in at a lower margin. Because as we scale our businesses, our cost continue to rise
and we have to make sure that they rise at the appropriate level along with our sales. We tend to see as businesses grow, we tend to see margin erode and that's what's happening here. So as you look at your margin and you think about your margin, the best way to think about this
is imagine that your revenue is growing at a certain pace, let's say 10 % a year. Well, then your expenses should grow at, I don't know, eight to 10 % a year, but your expenses could be growing at a faster pace. And therein lies the problem is in that margin erosion. And this happens, you're not the only one this happens to. This happens to
all businesses. It's happened to my business. It's happened to other businesses. It's just something that happens is that we let these expenses get out of control and we've got to bring them back in. Part of this could be that your business isn't running as lean as what it was when it was just you. That's the other component to this. So when we understand that this is something that's going to happen, the good news is that it's fixable.
we can fix this thing and you can fix this thing with some quick action. So here's what I want you to do. What I want you to do is right now today, I want you to go get that financial statement, go get the profit and loss statement. And I don't just want, know, like your year to date number. What I want you to get is I want you to get a three year income statement. And specifically I want it to show the percent of revenue.
on the right side. And so what that does, what it does is it shows you, hey, revenues are 100 % and then line by line on your expenses, it's going to show you what that line is as a percent of revenue. And we're going to watch our financial statements this way, not just with the whole dollar amounts. The whole dollar amounts really don't tell us much.
line. We're going to look at:
say that our cost of sold in:
We're gonna circle that bad guy, because he's the biggest, baddest enemy that's in our business today. We're gonna circle that one, and then what we're gonna do is we're gonna go line by line, item by item. We're gonna do a deep dive into that category, every single expense this year. And we're gonna get to the bottom of it. Now, what we're gonna find is a couple things. We're gonna find either that it's just that our cost of doing business has gone up, and we didn't see that.
⁓ we're going to see that as a potential, we're going to see that we need to raise our prices as a result of that. So maybe that's possible. We're going to see that maybe employees aren't buying as efficiently as possible. could see that. But whatever our, whatever we see during this deep dive, that's going to give us the actions in which we need to take to get this problem under control today. So.
The three steps that you're go through is you're going to grab the financial statements. You're going to get the ⁓ three-year, multi-year percent of revenue financial statements. You're going to do your bad guys. You're going to circle your bad guy. You're going to pick the biggest, baddest one that there is. And then you're going to do a deep dive and to go into look at the numbers. And that's going to give you some decisions to make. Cut my cost, raise my prices.
have a a all hands on deck meeting that we need to get our spending under control because that's the line on that you're getting fat. And when you get that one under control, then you're going to repeat and do it over and over again until you get your expenses back in line and basically get to the understanding of what's happening with your business because brother, that's your job. You got to know where that money is going. You got to know those numbers inside and out and every month.
You got to get the financial statements like that every single month and do a deep dive with your team. Don't just accept the whole dollars that you're spending. Look at it, control it because that's your money. Your business needs a budget. You need a budget and you got to control that. And you can, you can, you got this under control. You're going to pull it back out again. And what I want you to do is I want you to go do that. Give me an update. Tell me what the bad guy was. Everybody on this channel wants to know what it is. And if you have a
question that you would like answered for your business, head over to scotttodd.net forward slash ask. Give me your question and I'll be happy to help you fix your business. And I'll see you in our next episode.
