OK, let’s start with a question….How much money do you want to make from your business?
Sounds like a relatively easy question, right? But the truth is, it’s also a difficult and perhaps misleading question for many entrepreneurs.
When I have a first conversation with an entrepreneur, I always start with vision. What is it that you truly want for your life and your business? We talk about how you’ll feel, how you’ll be spending your time, where you’ll live, and the difference you’ll be making in the world, just to name a few topics, when you are living the life you want, usually about one year out to start.
We also talk about how much money you want to make. Because you have to be clear on how much money it’s going to take to support this lifestyle of your dreams, right?
Now, there must be some unwritten rule out there that new entrepreneurs unconsciously know, because when I ask this question, about 90% of the time I hear one of two answers…
“I want to make six figures.”
Or
“I want to make $10,000 a month.”
There seems to be a sort of magic about crossing the 6-figure mark annually or 5-figures in a month. But there is a catch.
The majority of the time when I ask some deeper questions about this goal, it becomes clear that what is really desired is to put 6-figures or $10,000 a month IN THE BANK. And that is hugely different.
As a business owner who is depending on your business to cover your personal expenses and support your lifestyle, you must differentiate between REVENUE and PROFIT.
Revenue, or income, is the money your clients pay you for your products and services. It’s the amount that you charge on their credit card or the check they write to you. Profit is what can be paid out to you in salary or distributions as the business owner after you pay all of the expenses of the business, set aside money for re-investment, and pay your taxes (Uncle Sam always gets his cut, right?).
When they are starting out, most entrepreneurs simply don’t think about everything that has to be covered by their business revenue, and it’s a costly mistake. They may reach the goal of 6-figures in revenue or have a $10k month, and they still don’t have the money in the bank that that want.
So how do you shift your goals to focus on the end result of PROFIT in your business so that your personal bank account matches your vision?
You start with profit first. In fact, there is a book called Profit First by Mike Michalowicz that is excellent, and in my opinion, a must read for entrepreneurs. In the book, the author gives you tons of strategies for turning your profit and loss statement “upside down” and establishing your budgets based on your revenue, which is a great strategy for an at least somewhat established business.
However, if you are just starting out, a percentage of nothing is still nothing, and it doesn’t quite work. Further, I believe that we get to design our business to support our vision and the lifestyle we want, and not the other way around. So while I love the overall Profit First approach, I always start with setting a goal for how much revenue you need to create to support your vision, and cover those pesky things like taxes, first.
When I work with my clients, we go through a process of looking at building their revenue goal from the ground up by looking at current versus future living expenses, what you want to reinvest in your business, and your business expenses. And it’s funny how the number so often turns out to be very close to …
Your desired annual dollars deposited in your bank account multiplied by 2
So if you are in start-up mode and you want to deposit 6-figures in your bank account, you are likely going to need to generate around $200000 in revenue in your business ($100000 times 2). You’ll be able to cover your monthly business expenses, set aside a contingency / reinvestment fund, and pay the tax man.
This is a little disconcerting to many new business owners, and I get it. And it’s critical that you go into your business with the reality of what you want to target to REALLY meet your goals. Wouldn’t you rather build a plan for your business that works towards generating $200000 versus planning for $100000 and ending up not being able to pay your personal bills?
This process is also critical as you build your programs and decide your pricing. If you are shooting for $200k in revenue versus $100k, might it change how you price your programs?
That’s what we’ll look at next week…how to decide your core pricing for your programs so that you meet your revenue and profit goals and don’t work yourself to death!
Until next week!
