Working Hard and Seeing Nothing for It? You’re Probably Last in Line.

A business owner I worked with did everything his coach told him. Grow the revenue. Hit $1 million. He got there.

Then he looked at what he’d earned for all that effort. He couldn’t pay himself a proper wage, and he’d borrowed over $200,000 to keep the business running.

His coach got paid. His suppliers got paid. His staff got paid. The bank got paid.

He was last in line.

I’ve seen this pattern for more than 25 years, and I don’t think it’s because business owners aren’t working hard enough. I think it’s because most of the numbers put in front of them measure volume, not what’s left for the owner.

Same number, two stories

Marketers often use a measure called MER, the Marketing Efficiency Ratio. It tells you how many dollars of sales you get for every dollar of marketing.

An MER of 3 sounds good. Spend $1, get $3 back.

Now turn it around. An MER of 3 means your promotion costs are 33% of your revenue.

Same number. It doesn’t sound nearly as good.

Here’s what that does to a business with $10,000 in sales:

At an MER of 3, $10,000 of sales leaves you $167. And MER of 3 or 4 is common, especially when you first start spending, because sales take time to follow.

We’ve seen this before

For years I’ve argued that LVR is the wrong way for business owners to think about borrowing.

Take a $1,000,000 house with an $800,000 loan. The loan-to-value ratio is 80%. That sounds manageable.

Measure the same loan against what you actually own, your $200,000 of equity, and your debt is 400% of your equity. That sounds very different.

LVR isn’t a dishonest measure. It’s the bank’s measure. It answers the bank’s question: “If this goes wrong, does the house cover our loan?” It doesn’t answer the owner’s question: “How much of this do I actually own?”

Follow the incentive

Twenty years ago, around a quarter of Australian home loans went through mortgage brokers. Today it’s over 80%. Many business owners now fund their businesses by borrowing against the family home, through a broker paid trail income on the size of the loan.

Many marketing agencies charge a percentage of your ad spend.

I’m not saying these people are bad. Most mean well. But their income grows with volume: a bigger loan, a bigger ad budget. So volume is the scoreboard they naturally hand you.

The cost that isn’t in the number

There’s another problem. MER usually counts only ad spend, not what you pay the agency to manage it.

Say your agency charges 15% of your ad spend. At an MER of 3, you’re spending $3,333 on ads, so their fee is $500. Because the agency is doing work for you, that fee belongs in People:

Once the fee is in the right place, the business isn’t making $167. It’s losing $333 on every $10,000 of sales.

And as your ad spend rose from $1,500 to $3,333, the agency’s fee more than doubled, from $225 to $500, while you went backwards.

A scoreboard built for the owner

This is why at 3 Months Forward we use Customer Margin. It takes every dollar of sales and shows where it goes:

Product: what you sell or the materials you use

People: everyone doing the work, including your agency, because they’re doing work for you, and including a fair wage for yourself

Promotion: what you pay to reach customers, such as ad spend

What’s left is your Customer Margin. Our benchmark is 20%.

It catches every cost and puts it where it belongs, so nothing hides inside someone else’s ratio.

One question to take into every meeting

For any number someone shows you, ask:

“Does this go up when I sell more, or when I keep more?”

MER, LVR and revenue growth go up when you sell or borrow more. Customer Margin only goes up when you keep more.

What to do this week

Ask every supplier for a breakdown of their costs, so you can see their fee separately from what they spend on your behalf.

Convert your MER into Promotion %: divide 1 by your MER. An MER of 4 means Promotion is 25% of revenue.

Run your own numbers through our free Customer Margin calculator: https://3mf.mykajabi.com/customer-margin-calculator

You’re not meant to be an accountant

If you’ve read this far and your head is spinning a little, that’s completely normal.

Most business owners didn’t start their business because they love spreadsheets. You started because you’re good at what you do: fixing, building, selling, serving. Financial numbers are a language most people were never taught, and they can feel daunting, even a bit embarrassing to ask about.

That isn’t a failing on your part. It’s one more reason why others’ numbers get handed to you and you’re left to trust that they add up.

At 3 Months Forward, we sit on your side of the table. I’ll be upfront about our incentive too: the 3 Margin Framework is built to measure what you keep, not what you spend or borrow. That’s the whole point of it.

Our job is to help you understand your numbers in plain language, so you can make decisions that pay you properly for the work you already do.

You’ve been last in line long enough. Let’s help you keep the money you’ve already earned.