Recognized as a premier thought leader & practical strategist who delivers documented gross margin gains and net profit results in today's highly commoditized, price-driven markets, Mark Coudray's passion is inventing exceptional business models and processes that excel to their fullest potential. Mark’s work has been published globally more than 500 times. He has also presented at hundreds of industry events over four decades. He is a Profit First Master.
Connect with our guest, Mark Coudray, on LinkedIn:
RESOURCES
Book: The Changing World Order, by Ray Dalio
Youtube Video: Principles for Dealing with the Changing World Order
Book: The Fourth Turning, by Neil Howe and William Strauss
Book: The Story of Civilization, by Will Durant and Ariel Durant
Book: The Sovereign Individual, by James Dale Davidson and William Rees-Mogg
Transcript
[00:00:20] Islin Munisteri: Hi, this Islin Munisteri with the rev ops careers and hosted by Theia Strategies .
[00:00:27] And I would like to welcome Mark Coudray onto the podcast.
[00:00:31] Mark Coudary: Welcome mark. Thank you so much. I'm so glad to be here.
[00:00:35] Islin Munisteri: So mark is recognized as a premier thought leader and practical strategist who delivers documented gross margin gains and net profit results in today's highly commoditized price driven markets, and his passion is inventing exceptional business models and processes that Excel to their fullest potential.
[00:00:55] Mark's work has been published globally more in 500 times. He's also presented at hundreds of industry events over four decades. I would like to also add he's a profit first master. I'd like to welcome mark to the show.
[00:01:09] Mark Coudary: Thank you.
[00:01:11] Islin Munisteri: awesome. This is gonna be a different show from the normal rev ops careers podcast.
[00:01:16] In that we're not necessarily going to go deep into Mark's career, but he's really a thought leader when it comes to the physics of profit and. Leverage and profit leverage committed the law of inverse effort. And we'll go into those basic concepts. But right now I think what's on everyone's mind right now is the recession.
[00:01:39] So can you share your thoughts on that? How long do you think it'll last? What does it mean for companies?
[00:01:45] Mark Coudary: This is since we're talking about rev ops my experience in now almost 50 years of being an entrepreneur and working with hundreds and hundreds of companies, including startups, VC funded Businesses bootstrapped individuals inherited businesses, every kind of business that you can imagine up to about 200 million in annual revenue.
[00:02:09] What I've learned is that the vast majority of businesses are fixated on top line revenue as an indicator of their growth. And I can appreciate that, but I've also come to learn that top line is vanity and bottom line is sanity. So unless you've got a positive cash flow and the ability to generate a positive profitability, your long term, sustainability is a business is doubtful.
[00:02:36] When we see situations that we're facing right now, moving into a recession, it's on everybody's mind. there's still plenty of business at this particular point, cuz there's still plenty of cash, but the companies that are gonna be having trouble during this coming recession or coming slow down, however you want to look at it are gonna be the ones that are chasing cash flow.
[00:03:02] They need the next deal in order to pay their bills. and as soon as their ability to raise funds, either through outside investment or through outside debt financing, short term debt long-term debt, that ability to generate cash is gonna dry up. This is the way that the fed has traditionally controlled inflation is by hiking up interest rates.
[00:03:26] I can remember way back in the day when I was first getting started. And the prime interest rate was 16%. And for small business, the operating lines of credit were 23% a month. 23% annual. So almost 2% per month, it was horrible. We're heading into that same kind of a scenario and it could potentially even be worse because there's more money now in circulation as a percentage of the economy than there ever has.
[00:03:54] So as, as long as consumer confidence remains acceptably high, the momentum will continue to move. But with the gas prices in an unrelenting acceleration at this point, supply chain being impacted the inability to have adequate supplies on the shelves of stores coming food shortages which is already starting to show up in many markets.
[00:04:20] Consumer confidence is gonna drop, which means that the demand for goods and services is gonna drop. And at that point, the cash flow merry-go-round starts to slow. And this is what causes businesses to get into real trouble is they can't meet their ability to pay their day to day operations.
[00:04:41] Islin Munisteri: Gotcha.
[00:04:42] And once that consumer confidence really goes downhill, that's when. Businesses will have to really fight for that remaining cash
[00:04:52] Mark Coudary: If they can even get it because the people that are spending if there's no confidence they're not gonna spend. So if you take away the demand in the marketplace, this is traditionally the way that they've slowed down the inflationary cycle.
[00:05:07] The living definition of inflation is too much money chasing too few goods and services. Right now we have tons of money and we don't have enough goods and services because of supply chain and labor availability, inability to deliver on contracts, whether it's service business, or whether it's a physical products business, if you don't have goods and you can't, don't have the ability to deliver the service, there's a shortage there.
[00:05:34] So the, that drives the price of those that can deliver up and that's inflation.
[00:05:42] Islin Munisteri: gotcha. So that's some basic economics there.
[00:05:49] So I guess like how long are you thinking. This will last since you've seen this, like over your 40 50 year career.
[00:05:56] Mark Coudary: I've never seen a recession go less than a year. It physically takes time to slow things down and we're starting to see things slow down. We're starting to see a drop in the GDP.
[00:06:08] We're seeing a drop. Output overall we're continuing to see the price of gasoline going crazy sky high today, where I live, the cheapest gas we can find was six 19 a gallon. And most of the major branded gasolines like shell and Chevron, and those brands were mid sevens to high sevens for diesel.
[00:06:31] 7 75, 7 69. I'm seeing that all over the place now as a normal thing, that's pretty frightening. Especially if you're in a business that requires you to drive a truck that gets poor gas mileage. When you've got gasoline, that's costing $150 to fill up a tank or $200 to fill a tank. It's just not sustainable.
[00:06:52] Islin Munisteri: Gotcha. And I, and we're recording this in June. Of 2022 right now. So I would have to say, yeah it's getting a bit scary out there.
[00:07:00] Mark Coudary: And I think also too, is that we're in an election year, so there's the whole political structure and the whole political pressures that are coming into play.
[00:07:09] So I think, and dynamically globally, the global politics I just read an article yesterday where Putin . , in Russia, they've been blaming him for the rise in price of gasoline and because there's sanctions against him and everybody's supposedly not able to buy Russian oil. And the report that I read was that he was gloating, that they are able to meet their financial expectations because of the global increase in the price oil.
[00:07:38] So I don't know, these are beyond things that we as mere human. Mortals in the mix of these global business efforts we can't influence that. We have to just react to what's going on as best we can. And I think the big challenge for every business is to say if business if orders slow down and the ability for me and my company to deliver what we do.
[00:08:08] Slows down, what are our choices? What can we do to protect ourselves? I think one of the things that I've seen as I work with my clients on my, in my business coaching standpoint is that I use the 80, 20 relentlessly. And one of the things within the 80 20, the basic one that everybody knows is.
[00:08:31] 80% of your profit is gonna come from 20% of your clients, the top 20%. But what they don't understand is that 64% of your profits come from the top 4% and 51% come from the top 1%. So the things that a company can do in preparation for the slowdown is to focus on that top 20%. Make sure that they are absolutely covered and that you can deliver for your very top clients, the small fish, they may go away because they're already challenged with their financial stability within their own operation, protect your primary sources of revenue and primary sources of profitability and primary sources of cash flow.
[00:09:14] Even a big customer. If they don't pay you and you run outta cash, you're done. I see this a lot. When small companies and medium companies sell to fortune 500 to fortune 50 they get hung out to dry on terms. And even though they've got a great top line number, if you can't borrow against that receivable in order to finance your growth moving forward, you're going out of business.
[00:09:37] So you've gotta stay liquid.
[00:09:41] Islin Munisteri: Wow. That is The insight there. Yeah. You gotta stay liquid in this time. And I guess going forward, like how, how should businesses, like in this time it's not really necessary about profitability at this point. It's about staying.
[00:09:54] Alive and making payroll and making operating
[00:09:56] Mark Coudary: expense. Yeah. And this is an excellent point, because again, once you start to really look at a business and most entrepreneurs, when they start their companies, they're all about whatever their service is, whatever their product is that they're selling. And then they realize the second phase is I've gotta sell this stuff.
[00:10:16] So I need marketing and sales to drive the production side of the. Then ultimately they realize that they need cash flow and financing in order to maintain the growth trajectory that they're on, especially if they're a steep growth trajectory. So it's understanding the relationship between cash and profit cash.
[00:10:40] Profit does not equal cash flow and available cash does not equal profit. If you're in a SAS business, for instance you have monthly recurring revenues or annual recurring revenues, which is fantastic because you get that at the beginning of the accounting period, generally speaking. So you have a good steady flow of cash flow.
[00:10:58] As long as you don't churn your account base. If you churn your account base, then now you've got higher acquisition costs, which impacts your cash flow seriously. So anything that you can do to increase your retention, anything that you can do to extend a lifetime value of your client. Is gonna protect you during this period.
[00:11:17] And now is the time to start the narrative with your customer base about what's coming, how you're preparing for it, how you're protecting their relationship with you and their relationship through the use of your product, whether it's a consumer B2C or whether it's a B2B channel that you're working in.
[00:11:38] Islin Munisteri: So I guess what would you cover in that, customer conversation? Like during a time of recession, like all hands on deck or would you to cover,
[00:11:48] Mark Coudary: so one of, one of my core mental models that I work with is I try and think five steps ahead. Whenever I'm dealing with a problem. I'm thinking about, okay, if I solve this problem, what's it gonna look like?
[00:12:01] And if I'm at that next step with the solution, what does that solution imply for the step after that? And the step after that and the step after that. So as I think, five steps ahead where most business owners stop is I've taken care of my immediate needs right now, the guy, my customer.
[00:12:26] Excuse me, my customer just bought for me. They paid me. I've got cash. Everything's great. What's next? When's the next purchase from that customer? Is there gonna be a next purchase from that customer? So you have to be thinking about what's happening. After you get the immediate transaction right now, what are you preparing to do for the next transaction and the next transaction after that?
[00:12:55] So it's looking forward and looking forward to anticipating what's coming. I call it break lights on the freeway.
[00:13:01] Islin Munisteri: I love your analogy of brake lights on the freeway. Right. , you explained that in our scoping meeting of it's like far off, you can see the brake lights, like in if you're driving and say this Utah desert, you can see the brake lights, five or 10 miles ahead of you,
[00:13:17] Mark Coudary: but you don't know what it is, but you don't.
[00:13:19] Yeah, exactly. And this is we, this is where we are right now. We're seeing the brake lights. We're seeing too much money. There are 80% of all dollars that have ever been in circulation in the history of the United States. 80% has been printed in the last two years. Oh my God. Oh my gosh. And nobody knows this because only if you're an economist and only if you're studying cash flow and money supply and economic systems, you realize what's actually happening.
[00:13:52] So all of these programs, which are we're gonna pay off all the student loan debt, that's politically expedient right now, people are excited about that, especially if they're young people, but where's the money coming from. We're already deficit spending. They just create more money and create more debt.
[00:14:09] And so who's that really helping they're transferring the debt from the student to the taxpayer because the taxpayer now is on the hook for this money that was created and sold through bonds. To make this happen. The same thing with any of our foreign relations, the same thing with our deficit trade there's, all of these issues, all of this we're spending beyond what we can comprehend at this point.
[00:14:33] So that's a break light. We're seeing that there's a something happening, but we don't know how it's gonna affect us. The closer we get to the event, we start seeing at those lights that we saw ahead, they're not yellow lights, which would be. A tow truck trying to help stranded motorists they're red and blue lights, which means there's a real emergency ahead.
[00:14:55] And as we get closer and closer, we start seeing that it's not just one or two red lights and blue lights that are flashing. It's like the whole road is flashing. So that means there's multiple emergency vehicles. There's fire first responders, there's police. There may be ambulances. At that point, we have to decide, are we gonna stay in this.
[00:15:15] Or are we gonna take a frontage road or are we gonna take a new route entirely around where we're going? So this ability to forecast in the future is to understand the past and to understand historically what has happened during these inflationary recessionary cycles, which go back to 1814, by the way.
[00:15:37] So this is not something new. This is a 200 year old cycle. That we've gone through since the early 18 hundreds.
[00:15:46] Islin Munisteri: Wow. So this is so to be honest, this is nothing. This is nothing new that's happened. Absolutely. In the us,
[00:15:54] Mark Coudary: it's only new because especially for young people. And when I say young people, I'm talking about gen Z and millennials.
[00:16:01] For the young people. They haven't seen this in their entire lifetime. The millennials were born after 1980. The last time we had this kind of a situation was 19 79, 19, 19 80, 19 81. The babies were just being born at that point. They've never seen with the exception of the 2008 financial crisis.
[00:16:20] They've never seen the impact. High inflation due to high too much money. And the quelling of the inflation by raising interest rates, even during 2008, there was monetary stimulus, which basically means printing of money to keep people active and moving forward. But in the process of creating more more money in the cycle.
[00:16:43] So it's inflationary going back to 2008.
[00:16:47] Islin Munisteri: Oh, wow. So this is not new. It, we it's happened before. And the good news is that it'll last one, at least one year, maybe two years and we'll get through it.
[00:17:01] Mark Coudary: Yeah, I think this time is different. The reason that this time is different is that for the past 70 years the world has operated.
[00:17:11] With the us dollar being the reserve currency of the world, which means that there's a world market for all of the bonds that we're selling to the world. People would buy us bonds because the full strength and credit of the us was behind those bonds. And it was considered a safe investment. And the us has lent money to virtually every country in the world, including Russia, including China, including our enemies.
[00:17:38] Everywhere the
[00:17:40] us money is in there. What's happening now is that if you trace back the history of world reserve currencies, which go back to the 16 hundreds, the mid 16 hundreds with the Dutch and then with the English, and then with the us, they go through a 70 to 100 year cycle or 150 year, they go through about a 150 to 200 year cycle of being the dominant currency in the.
[00:18:06] And we are currently 70% on the downside of the cycle for the us dominance. So this has never happened before in the past, we've been able to spend our way out of these little inconsistencies that, that have come along this time. It's not happening. And if we look at the curve where the curves overlap, the us is 70% of the way down.
[00:18:32] China is 70% of the way up. They're crossing at the 70% and the 30% area we're declining their rising. So this time through, I don't know what's gonna happen. And if anybody's interested in finding out more about this, they should read Ray Dalio's new book that just came out a few months ago called the changing world order.
[00:18:55] He does a fantastic job of explaining this in ways that people can understand. And it's incredibly well documented. He's done a YouTube video that's 41 minutes long, which is the compressed version of it. It's. And that's just one of a, of at least a dozen different references that I've been studying for the last year and a half to try and get a better scope of what we're headed towards.
[00:19:24] Islin Munisteri: And that helps you advise your clients going forward.
[00:19:28] Mark Coudary: Learn from the history. I've learned a long time ago that the original primary. Research and the primary academic thought on any major area, whether it's technical, technological, whether it's science, whether it's economies or whatever.
[00:19:46] The original thinking was done anywhere from 25 to a hundred years prior. And at that point, nobody's listening to it, cuz they're not thinking that far ahead, but when they manifest, the original thinking has already been done and the original analysis has already been. So I go back in history to learn from history and to then now apply those perspectives moving forward.
[00:20:12] Islin Munisteri: Wow. That's great. And I guess who, who else? Who, what other perspectives are you? Are you reading?
[00:20:18] Mark Coudary: There's some really good ones out there. One of them is called the fourth, turning. That was written in 1997. And it talks about this cycle of what happens every 80 to a hundred years.
[00:20:30] And we are at the end of the fourth turning the last, the end of the last fourth, turning was 1945. Which was the end of world war two then we went through a period of rise, which is the first cycle of the four turnings. And we hit the growth peak of that in the sixties and seventies. And then we started to decline in the eighties and nineties, and now we're at the very bottom of the fourth turning which is due to end around 20 24, 20 25.
[00:20:59] Which coincidentally is a presidential year. So when you take that perspective and you line it on top of the changing world order, and then you go back and look at some of the other historical books lessons in history by will Durant, which was written in 1945 and the sovereign individual, which was written in 1997, also, which talks about the impact of the digital economies.
[00:21:25] With the decline of analog technologies and the rise of cryptocurrency the rise of the internet the impact of globalization, all of these things that were just beginning to start in the mid nineties, they were all completely predictable wow. So all that in total, you've got independent validation of concept from multiple perspectives that were all happening about the same time, but independently of each other.
[00:21:59] So to me, that is a pretty good indication of other thought leaders and other thought processes to, to validate where we are.
[00:22:12] Islin Munisteri: Wow, those are some great resources.
[00:22:14] Mark Coudary: Most of them are available on auto on audible. If you wanna listen to 'em on audible. I think all of them are actually
[00:22:21] Islin Munisteri: cool.
[00:22:22] I'll I'll put links to those books in to Amazon
[00:22:26] Mark Coudary: It's really interesting that the sovereign individual completely predicted. The use of pandemics as a method to control commerce, immigration, and the flow of people between countries in order to control the flow of tax dollars. And it was like, I literally, when I heard that and I, the, when I read that book by and heard it for the first time was in July of 2020, in the middle of the first wave of Corona. It literally stopped me in my tracks when I heard them predict what one of the mechanisms would be to control global commerce and to control the flow of money away from high taxation states like the United States and Western Europe, where we have very high taxes relative to the population with the internet, you can do your business anywhere in the world.
[00:23:20] Why would you do business in a place where there was high taxes when you could be offshore in some other location where there were no taxes were very low taxes. So I think that the the governments are beginning to realize that we've got a flow control, the flow of money, and this led to the need for encrypted currencies is what they said, encrypted currencies that can't be tracked or traced.
[00:23:43] And it's okay, that's blockchain and that's cryptocurrency. So it's very interesting that they're able to extend the impact of all of these changes onto how we do business and how things are today. They were right spot on. Oh, wow. And they were hedge fund to New York hedge fund managers, directors that wrote the sovereign individual.
[00:24:09] So these were people that were predicting where business was gonna be. And this was before Amazon. This was before any eCommerce business rose. This was before crypto even existed. This was before blockchain was even conceived. These were all the fundamental foundations that we have evolved to today.
[00:24:27] Islin Munisteri: That's amazing. Wow. So this was all the seems that it was all predicted in a few books. In the 1940s and the 1990s.
[00:24:36] Mark Coudary: And this is one of the challenges that I have right now is that with the rise of digital technology, the attention span has just declined to almost nothing we're used to swiping.
[00:24:51] We're used to scrolling, we're used to texting. We're used to, changing our attention every 10 seconds. How is it possible to sit down and literally study and read the history? They don't teach the history anymore. The way it needs to be taught all of this exists, but we have to look it up for ourselves and we have to find it in different ways.
[00:25:14] And I look to people that are older than I am, which is like dirt older than dirt. To talk about what it was like when you were growing up, what was it like post world war II? What was it like in the thirties and forties when you were growing up and, they talk about the depression and what it was like, not being able to get food.
[00:25:31] And you know how desperate it was. There were no jobs, there was no money. There was no food. How did they get out of that? It was the WPA, which was the work
[00:25:41] Islin Munisteri: program, public admin or something. And that
[00:25:45] Mark Coudary: was all money that was made out of nowhere because FDR took the us off of the gold standard and unlinked the currency to gold reserves.
[00:25:56] And that allowed them to print more dollars with no backing behind the dollars that's called Fiat currency. And that was the beginning of the way that we've done business for the last hundred years.
[00:26:08] Islin Munisteri: Wow.
[00:26:13] Yeah. I remember in my economics courses that we went off the gold standard and now we're on this weird floating. Us dollar reserve dependency, but
[00:26:22] Mark Coudary: It's the global us reserve currency. Yeah. So it's the world. It's the world's trust in the us and with everything that's happening right now, the world is losing its trust in the United States and is seeing the rise of other powers.
[00:26:39] As being more trustworthy than us and. When you said earlier, what do you see moving forward at the end of this fourth? Turning? I really don't know. We're at an alignment that we've never been in these conditions at this, these levels before.
[00:26:57] Islin Munisteri: Wow. So it's really a combination. It's not just the regular inflationary recessionary area cycle you're saying, or at the end of the fourth, turning.
[00:27:06] We're at this weird, like China's 70% up. We're 70% down. We're on like, who's going to be the next currency. And there's also political
[00:27:17] Mark Coudary: interplay. Well, and, if you really look at projecting forward and looking at potential outcomes of this, because the global economic system is so tied to the us dollar as the reserve currency.
[00:27:35] If the us goes down, the world goes down. And so if you look at the impact on the global economic situation and global food supplies and global supply chain and everything else that revolves around commerce and the ability to pay your bills this has the potential to be in aligning for a global.
[00:27:59] We're basically you repool everything together into one currency that's traded globally. And the precedent for this was set in the late nineties. When Europe went on to the Euro and moved away from individual currencies to Frank, the mark, the yen, not the yen, but the Frank, the mark the Lira in.
[00:28:21] And they all went to the Euro, which is a common currency between countries. So that is the model for a global currency.
[00:28:29] Islin Munisteri: And Europe went to Euro in the 1990s.
[00:28:32] Mark Coudary: Yes. Early, early nineties.
[00:28:35] Islin Munisteri: So they, so that's the model for a global currency. If we do go there. Yeah.
[00:28:44] but would you say the global currency is not based on any reserve? Again, it would be,
[00:28:48] Mark Coudary: there is no reserve anywhere. There
[00:28:49] Islin Munisteri: is no reserve.
[00:28:50] Mark Coudary: The world is working on Fiat money. And if you look at the history and again Ray Dalio goes into this incredibly well around the history of money and the changing world order people don't understand the economics. They don't understand the role of money and how money was created and used.
[00:29:08] And if we look at inflation over time, the reason we have inflation over time is because they continue to dilute the value of the money by printing more money, that's backed by nothing. And we're just chasing that forward business model and the cashflow that results from that forward business model.
[00:29:27] But the question is, are we really adding any more value even if the price is going up, we're not really adding any more. So the question becomes what is value and how does value fit in to the business models that we're creating? And especially in the startup world, this is huge right now because it's so many companies are based on disruption and acquisition, but they're not concerned with the profitability of the business.
[00:29:58] They're only worried about. Is it something disruptive? Can I migrate an existing market to my new platform and eliminate the old school and replace it with my model? And then even if it's not profitable, like Uber or WeWork or any, one of the number of other ones, it's somebody else's problem to fix it.
[00:30:16] That's just a pyramid scheme. That's just a Ponzi scheme. It's like the new money is replacing the old money and then it's the new money's fault to add value to it. I don't know that game. I played that game. I've been part of that in several different situations and I find it very uncomfortable for me from being a traditional, i'm such an OG that the values that I've got maybe has been the lifetime experiences that I've had that say, I don't want to go down that road anymore, even though it's a shiny potential object it's in the long run, it doesn't play.
[00:30:52] Islin Munisteri: Wow. Yeah, I, yeah, sometimes I see a lot of like private equity and venture capital and I'm like, I have no idea how you're making money and how you're funding all these tech companies, but
[00:31:02] Mark Coudary: They're not it's money that was created out of nowhere. That's invested into an idea. Which is one of the primary fundamental differences between analog economy, where things were physically made and sold and an intellectually based digital economy where we're selling intellectual property.
[00:31:20] And this is a huge challenge from a standpoint of how do we track value and how do we assign value to what we're doing? I see this a lot in the SaaS community. I've got good friends right now. Were recently bought by a growth equity company. And they had a really strong user base. Everybody was super happy.
[00:31:42] And they took on the growth equity partners to improve their growth rate and to be able to bring in more software engineers and all that kind of stuff. And within two or three months they had doubled and tripled their monthly subscription and the user base is freaking out because they went from a hundred dollars a month $400 a month in one shot.
[00:32:05] And it's you're hooked you're in your switching costs is gonna be crazy to move out. What are you gonna switch to? I call it the economic drug dealing model. Get 'em hooked at low prices. Get 'em addicted to the situation and fully embedded with it and then raise the price to the fullest potential.
[00:32:24] And that is not a sustainable model in my book, but I see it happening frequently.
[00:32:34] Islin Munisteri: Wow. That's really sad
[00:32:35] Mark Coudary: to hear. It's just a business strategy. It's not sad. It's not predatory. It's just a business strategy. And if you think about it, the growth equity companies have been through this before they recognize the value that's on the table.
[00:32:50] The company that was the startup that created the solution, all they saw was a better solution that they could disrupt the market. And they weren't making enough money to sustain themselves on their own. So they had to bring a partner in and that partner said, okay, I recognize what's coming. I've been there before.
[00:33:09] The value is undervalued. This is our opportunity to make more money. And so it's just a business strategy. And once you see it happening and you see it happen over and over, you can anticipate where the opportunities are. If you want to participate. Form of business that, that type of a business model, is it right?
[00:33:30] I don't know if it's right or if it's wrong, it's just the way that people are doing it and they're assigning different values to it.
[00:33:38] Islin Munisteri: Yeah, I don't know if it's right wrong, sad, or bad or what, whatever it is it, when you really look at it like in its simplest terms about assigning morals to it's just the business strategy. But yeah, to scale, right? To go from like step a to step B. Or like to get the seed rounding or seed funding or whatever you need.
[00:33:58] Like you, you gotta decide
[00:33:59] Mark Coudary: And think about this to think five steps ahead. The equity firm that's buying. It goes, look, we bought these guys low. We were able to increase the value by 300%. This is a really good business. We only had X amount of attrition because everybody's so embedded with that technology.
[00:34:17] Now they've got increased value as a multiple, and it's all recurring revenue and boom. They sell it off to the next guy and they make a ton of. But in the meantime, they've alienated their base and they've weakened everybody. That's using that solution because now it's impacted the end user because their costs have gone up so much.
[00:34:38] So it's got consequences and you have to think about the impact of those consequences and how you're ready to go to mitigate. or how are you going to change those circumstances to strengthen that relationship and that lifetime value and the retention value? The people that are doing their due diligence.
[00:34:56] I was speaking of to a acquiring agent individual that was working to acquire companies just yesterday. And he was saying, I am shocked at the. Lack of due diligence on the part of the people that are buying companies today. They're not asking the right questions. They're not looking at the right things.
[00:35:17] If you're representing the seller, that's fantastic. But if you're representing the buyer, then you're asking hard questions that kill the deal
[00:35:27] Islin Munisteri: Gotcha, so you need to, yeah. The buyer definitely needs to do the due diligence. That's key. You can't just throw money. And it's, but you, but they thought we
[00:35:36] Mark Coudary: Are, are they asking the right questions? That's the real issue is that if I throw a bunch of metrics out there, I'm gonna show you metrics that make my company look really good. I need to know what metrics are really the true metrics. What's the lifetime value. What's the retention period. What's the churn rate.
[00:35:56] What's your growth rate? Independent of churn. And what's your total addressable market. If you've got an addressable market and you're losing 30% of your people a year, and you're showing a 12% growth rate, that's really a 42% growth rate because you gotta replace 30% in order to get to the 12th.
[00:36:17] So if you're growing at 42%, how is that impacting the total addressable market that you can grow to? So it's those kinds of questions. owners are not asking.
[00:36:33] Islin Munisteri: Gotcha. Yeah, these are basic. I feel like these are basic questions that, that people should know the answer to. Well, but but I have to admit we're actually in the process of fixing our accounting system right now.
[00:36:51] And. Yeah. Trying to get all the letter ledgers and journals. Correct. And everything is quite challenging, but we need to be auditable. So
[00:37:00] Mark Coudary: The whole accounting system is based on gap and gap was designed for an analog world of manufacturing and service. It was not based on the world that we live in today.
[00:37:11] And we really need to be creating an accounting system. That's based on activity costs, activity based costs, as opposed to standard costing, which is what gap was based on.
[00:37:24] Islin Munisteri: So gap was based on what, what
[00:37:25] Mark Coudary: costing standard costing. And standard costing is to say, here's our overhead. If we divide our overhead by the number of hours we're producing and we can produce X number of units, then our cost per unit is our total operating cost divided by the number of units.
[00:37:43] That represents our standard cost. And then from there you can develop budgeted, hourly rates and efficiency factors and all that kind of stuff. Variances from that. This is the way it's always been done, but it's not representative of the way that. A disruptive economy is growing. So this collision between the digital world and the analog world is exactly what they were talking about in this, the sovereign individual because the systems that we measure it by are no longer accurate.
[00:38:12] And if that's how you're evaluating a management decision is based on gap or based on your traditional accounting models that have been taught in school, even today, activity based accounting. Is not really dealt with very aggressively. It may be mentioned casually, but even the accounting professors really don't understand how it works.
[00:38:36] And yet it's fundamental. It's more forward looking than rear view of the account economy, which is what gap is, which is what fiscal accounting is all about. It's reporting on past events as a, as opposed to predicting future events based on activity.
[00:38:57] Islin Munisteri: Wow, that is quite,
[00:38:58] Mark Coudary: I didn't want to turn this into an account unless
[00:39:00] Islin Munisteri: No, this is good because like the rev ops world, like part of rev ops is as much as I hate to say it, there is an aspect of accounting that you cannot. Get away from like I know in taking the HubSpot rev ops strategy course, they went for I think at least 30 minutes into basic accounting terms and that type of thing, like revenue, operations is part of business operations.
[00:39:27] So you need to understand the revenue numbers very well.
[00:39:31] Mark Coudary: So you need to understand the marginal. So top line revenue is nothing until you deal with marginal revenue. Marginal revenue is the available money that you have to pay your bills, pay your costs, invest in customer acquisition, so on and so forth.
[00:39:48] And what happens is too many of these models don't have enough sustainable marginal revenue to keep the business moving forward.
[00:39:57] Islin Munisteri: Oh, wow. And what's the, I guess what's the difference between. Top line revenue and marginal revenue.
[00:40:04] Mark Coudary: Top line revenue is the total sales price. Yeah, so we did 5 million last year in business or 10 million last year.
[00:40:13] Okay. Then we look at what it cost us to deliver that product. That's like how much wood did we use? How much, how many software hours did we use? How many engineers did we need to do that? Whatever it is, the direct cost of delivery is subtracted from that top line. And that leaves margin that's left to do anything with it could be paying down debt.
[00:40:38] It could be paying your monthly operating expenses. It could be investment in new technology. It could be R and D. It could be advertising and marketing to get new clients. All of that comes out of the marginal revenue. And so you have to have enough marginal revenue in order to, to sustain the direction.
[00:40:58] Otherwise you've gotta go out and get funding. And that's where your seed rounds, your round, a, your round B your round C come into effect because that's all extra money to drive acquisition costs. It's a above and beyond the cost of delivering the product.
[00:41:17] Islin Munisteri: Wow. That's the best way I've heard accounting explained in a long time.
[00:41:24] Mark Coudary: awesome. And profit first you mentioned that I was a profit first master profit first changes. The accounting equation from revenue minus expenses equals profit. And in rev ops today its revenue minus expenses equals negative profit, which we make up through additional. So we're showing an operational loss, but we're making up the difference with more funding from outside as equity funding from the outside.
[00:41:51] They changed the equation to revenue minus profit equals expenses. And so you're taking your anticipated profit first. That's why they call it profit first. And that leaves you with a negative expense number that you, it forces you. Reconcile that and come into grips with it. Like, how am I gonna make this up?
[00:42:14] You can still do it through outside investment. Through outside funding, which is usually done through either debt or through equity, which is ownership of your company. And most of the time it's done through equity. So you're giving up control and you're giving up percentage of your.
[00:42:32] In effect to get running get money, to get more customers and to pay the operational cost of what you're doing. Wow.
[00:42:44] Islin Munisteri: So that's why we have seed and series a and just to keep it really simple.
[00:42:49] Mark Coudary: I've boots, strapped every company that I've ever built. And I got real real world education in this really quick.
[00:42:56] My first company. 50 years ago, went from 200,000 to 4.5 million in 18 months with no outside funding, no computers, no spreadsheet, no internet, no social media, no email, no fax, just a telephone and good idea and go out and set up a sales presentation. When you grow that fast, you better be making money because you've got, fuel that growth really quickly.
[00:43:29] And what saved me was I went after larger orders. So I didn't need to acquire a lot of customers. I was able to sustain it because I didn't have customer acquisition costs and I had a good lifetime customer value, really high value. A customer value might be 200,000 or, 300,000 per customer.
[00:43:50] Back then, which in today's dollars would be, somewhere around a million dollar cus lifetime customer value, which is fantastic today. It's unless you're working in enterprise and you're working with really large companies, a million dollar customer lifetime value is pretty high.
[00:44:07] Islin Munisteri: Yeah.
[00:44:07] That's yeah. That's definitely enterprise account executive type of deals. But wow, this was great, mark. I learned a lot today from you and I hope our listeners did too.
[00:44:21] Mark Coudary: I hope I didn't. I hope I didn't blow. Anybody's head up. No,
[00:44:24] Islin Munisteri: I don't think so. You shared a lot of great resources and books.
[00:44:28] Mark Coudary: I, I would really be, I'd be really curious at the feedback from listeners that have this to post comments, to the podcast and just to follow up on those comments, to how that landed, how all of this landed, was it too much? Was it too confusing? I do this every single day.
[00:44:46] So for me, it's hard to understand if it's making a direct connection. You tell me, how did it feel to you? Did it feel overwhelming or was it, how did it feel? Yeah,
[00:44:57] Islin Munisteri: it felt it felt good to me, at least from a business owner co-founder perspective.
[00:45:03] Mark Coudary: So that's good. That's where it was aimed.
[00:45:04] Islin Munisteri: It's not just, revenue operations is.
[00:45:07] Facet of your business. But you really need to understand the accounting principles where the economy is headed, why people are raising seed in series a and all like these basic concepts that, that people are like, you hear all the news about it, but you don't necessarily understand the basic concept of they can't.
[00:45:27] They're marginal revenue goals. So they're trying to raise that series a or seed.
[00:45:30] Mark Coudary: And right now the buzz in the VC community is founders buckle your seat belts because there's no more money coming. Get your act under control, get your costs under control. It's the gravy train's ending and, you can, there's been a bunch of articles written just in the last three weeks warning founders.
[00:45:52] The growth rate and the direction moving forward, there's gonna be a big shift in the direction of the wind. Awesome. So be prepared.
[00:46:00] Islin Munisteri: Great. Thank you mark, for being on the podcast and we'll talk more,
[00:46:05] Mark Coudary: been a pleasure to be here and I'd love to come back and continue conversation.
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