One of your revenue lines looks incredible on paper. Another looks barely worth doing. Before you act on either, somebody has to answer what it actually costs to deliver each one, and in most companies nobody has.

Kim and I are opening Module 6, Transferable Margins, with Milestone 16, and the honest version of this milestone is not a spreadsheet. It's an agreement. I told the story of my family's copier company, where we ran four divisions and every one of them lied to us in a different direction. The sales reps' entire salary sat in equipment cost of goods, so print looked healthy because it had no salespeople in it. We couldn't sell print without them. IT services looked fantastic because the whole industry parked that payroll in overhead. Document management looked like 95 percent margins until you counted the years of service behind the sale. We had no visibility into what we should do more of and why. Kim brings the revenue seat to it: her rates of change, the monthly margin-by-customer review, and the annual audit she calls losing the losers. Start with the benchmark. Then ask what your competitors put inside it.

Top 10 Takeaways

1. Predictable revenue tells you what's coming in. Margins tell you whether it becomes wealth.
2. You can't choose what to sell more of until you agree what delivery actually costs.
3. Transferable margins means each line runs without you, at the margin your goals require.
4. Revenue is the CRO's number. Gross profit and gross margin belong to the COO.
5. A line looks profitable when its real costs are sitting in another line's column.
6. Start with your industry benchmark. Then ask what costs your competitors put inside it.
7. Test every cost simply. Without this, could you deliver the work at all?
8. Need the equipment to deliver? Its depreciation belongs in cost of goods, not overhead.
9. Rising gross profit dollars can hide falling margins. Read the percentage, not the dollars.
10. Land on your cost rules and keep them. A steady baseline beats a perfect one.

Chapters:
(00:00) Kicking off module six after predictable revenue sets the foundation
(04:19) Revenue meets margins: the CRO and COO trade-off
(05:30) Defining transferable margins and breaking out true line costs
(09:56) Revenue is the CRO's number, margins belong to the COO
(12:05) Finding your industry benchmark through an investor's-eye view of margins
(17:00) Rates of change, three-month trends, and boiling-frog cost creep
(25:29) The Goal, throughput, and does the customer value it
(29:58) Customer profitability reviews and the annual lose-the-losers audit
(31:43) Ryan's copier company: four divisions, four hidden costs
(39:45) Start with industry benchmark, then check what's included
(42:46) Test every cost: equipment depreciation belongs in cost of goods
(47:00) Land on cost rules, consistency, and the CPI curveball

This episode was produced by Castos Productions.

Sound Bites
"We might end up having a problem where I say our revenue is declining on our most profitable work, and our revenue is increasing on our least profitable work. That's a conversation the COO and I as a CRO are going to need to have." — Kimberly Clark
"With those four divisions, we had no visibility on what we should be doing more of and why at any given point." — Ryan Tansom
"My dad used to say, where there's mystery, there's margin. That's why we make it complicated." — Ryan Tansom
"I haven't seen most people go through the process of even getting agreement on where they stand." — Ryan Tansom
"It's better to be slightly off, but still be able to have a baseline to compare to over time, than it is to keep trying to tweak and adjust to reach perfection." — Kimberly Clark
"We don't want to do that to our business. We want real information, even if it's bad." — Ryan Tansom

Resources:

The Goal (Eliyahu M. Goldratt) — the Theory of Constraints book Ryan names when he moves from margin to throughput inside a line. — goldratt.com

90-Day Boardroom Blueprint — where owners build the three-statement model and the per-line margin breakout with Ryan and Kim. — independencebydesign.io

Ray Dalio — Ryan quotes him on worry: if you're worrying, you don't need to worry, and if you're not worrying, you should worry. — principles.com

Consumer Price Index (CPI), U.S. Bureau of Labor Statistics — the closing argument. Ryan's point is that it has no unit of measure and a shifting basket. — bls.gov/cpi

Related episodes:

Ep. 503 — Ryan & Kim: How to Stop Automating Chaos and Get Revenue Data You Can Trust — listen

Ep. 502 — Ryan & Kim: How to Map Your User Journey and Stop Lighting Marketing Money on Fire — listen

Ep. 499 — Ryan & Kim: How to Build the Revenue Blueprint That Makes Growth Predictable — listen

Ep. 492 — Ryan Tansom: How to Analyze Your Margins and Gross Profit — listen

Ep. 489 — Kim Clark: The Profit War Room — listen

Ryan Tansom Website: https://ryantansom.com/

Kim Clark — Chief Revenue Officer, Independence by Design (co-host)