- Start thinking of yourself as a business
- Paycheckearners have stable take home earnings, business owners might not
- For business owners, volatile revenue results in unknown take home earnings
- Instead of focusing on revenue targets that are unpredictable, focus on maximum effort
I never said never, I just mean why you shouldn’t forecast your revenue now, for those who are building businesses. You see, when you earn a paycheck, your income is relatively stable. Barring any layoffs, economic downturns, or political infighting, people who earn a paycheck can predict their take home income. It’s the bi-monthly check amount, multiplied by two. Simple math.
However, for people who earn money directly from the profits of a business, or derive their monthly salary directly from a business’s success, predicting take home income is a little trickier. And the trick lies with revenue. Stable businesses, especially those of the public kind, have a good shot at forecasting company revenue, but that’s not the type I’m talking about. When I say “revenue,” what I mean is earnings, in the form of top-line business cashflow, that results in personal income.
If you’re a small business owner – even one who plans on growing it to a 100 million dollar company – the revenue that directly results in your personal income is your number one concern. But, by definition, small businesses are susceptible to volatile revenue, and unlike a paycheck, it can’t be predicted with 100% accuracy.
This causes challenges when planning for the future. So, how can we effectively forecast or revenue so that we can predict our take home earnings? What’s more, how can we plan, giving an unknown environment?
It’s All About Revenue
I don’t mean to be patronizing. If you understand the idea of revenue and it’s overall importance, feel free to skim on, but skim, don’t skip. For those who need a refresher, or if you’re a paycheck earner, read this section. It’s high time we all started thinking of ourselves as businesses.
Revenue is the first number on a company’s Profit and Loss Statement. It’s the total amount of units sold, multiplied by the unit price, or is the total amount paid by clients for services rendered. Basically, it’s what ya make from selling your good or service to a consumer. For paycheck earners, your revenue would represent your monthly salary, prior to any taxes or benefits (your yearly salary, divided by 12 months).
From there, costs of goods sold are subtracted, to give a business its gross profit. If a company sells a widget for $5.00 and it costs $1.00 to make, the gross profit off of each widget sold would be $4.00. Multiply $4.00 by the number of widgets sold, and you get a company’s total gross profit. Multiply $5.00 by the number of widgets sold, and you get a company’s total profit, etc. For paycheck earners, gross revenue would equal monthly salary, minus any pre-tax benefits (retirement, commuter, etc.)
After gross profit is calculated, a company subtracts all of its operating expenses from that number, producing its operating profit. From there, and this doesn’t take into account complex financial structures, taxes are calculated as a percentage of operating profit. For LLCs, that tax rate would be a business owner’s ordinary income tax rate, and whatever is left over after taxes represents a small business owner’s take home earnings.
For a paycheck earner, operating profit / profit is calculated by subtracting all taxes from the gross profit number (or their monthly salary minus pre-tax benefits). This would give a paycheck earner their monthly take home earnings. However, as I’m sure you’ve noticed, the paycheck earner has yet to pay any expenses, meaning that they cover all their costs with their personal profit.
But, as is the benefit of owning most businesses, an owner can run most expenses through the business before calculating operating profit, reducing taxable income. So, where a paycheck earner has taxes taken out prior to paying any expenses, a business owner pays most expenses prior to paying any taxes, saving roughly 35% to 45% on every dollar spent. Which means, from a financial perspective, a company’s business structure provides more positives than a paycheck.
This all excludes volatility. For a business to plan successfully, and for a business owner to achieve financial peace of mind, monthly revenue and monthly operating expenses must be forecasted with accuracy. Without accurate predictions, a business might thrive one day and be gone the next, and a business owner might be solvent one day and living on credit the next. Thus making a bi-monthly paycheck safer. Not necessarily better, just safer, for the moment anyway. So how can we as business owners predict volatility and give ourselves financial stability?
The answer: you can’t. It’s impossible to predict volatility. But, it isn’t impossible to predict that volatility will exist. In fact, it’s quite easy. Here, I’ll do it now: volatility will exist. It could take the form of seasonality, client turnover, or even something positive like exponential growth, but it will be a major factor in any business.
Especially with a new company. Imagine revenue being the top of the business funnel, but if you don’t yet know what the funnel is, or what it will look like, generating predictable revenue is impossible. A friend once asked me during my first year of business: “What are your revenue goals for the quarter?” Uhh, I dunno, how ’bout we sign a client first and then I’ll worry about sales targets? I was grumpy back then. But still, it highlights the point: when you’re starting with nothing, its hard to predict sales, and it might not even make sense to do so.
But this doesn’t excuse the fact that stable revenue is paramount for a business owner. So, how do you predict it? How do you know what your take home earnings will be? Your runway is critical to the success of you and your company. Business cashflow is literally lifeblood. It’s imperative that stable revenue is achieved and then maintained, so it acts as reliably as a bi-monthly paycheck. But how?
Focus on Effort Rather Than Forecasts
In the beginning, the issue isn’t predicting stable revenue, it’s generating enough revenue to make stable at all. That’s where people get tripped up. Revenue goals? How can you come up with a formula that increases business revenue from zero to anything? wouldn’t that, by definition, be either undefined, zero, or infinite? Not very helpful goals.
But as a cash flow business, you need revenue in order to survive, same as your company. Yet revenue targets are out the window. And at the same time, I cringe writing that. Targets may be unnecessary, but goals most definitely are necessary, and I want to be clear on the distinction. I’m not saying, “don’t have goals,” I’m saying, “be realistic about your stage in the business lifecycle and plan your goals accordingly.”
And when you’re starting out, sales goals aren’t important. What’s important is effort, agility, and discipline. Qualitative things, I know, but the only things you can rely on. I say this because I’ve operated in these unknown environments. Say you have two clients spending $10k a month each ($20k total), and your goal is to reach $50k a month. You figure that two more clients will get you to $50k, but then both your existing clients leave and you’re left with nothing. What’s your goal now? Has anything changed?
No. Your initial goal was basically to get more clients. After your existing clients left, your goal was to get more clients. Even the day-to-day remains much the same. Previously you were servicing your clients, and at the same time you were grinding it out, prospecting and making connections. Afterwards, the only thing that changes is that you now have more time to prospect.
So, whether you have $1k in revenue or $100k, the goals should be similar: put in maximum effort, work effectively, and have the foresight and agility to pivot or reposition should a strategy need to be changed. As long as you do those three things, increases in revenue should take care of themselves. Then, when revenue has reached a comfortable, sustainable level, you can take solace in having predicable earnings, because you know that your effort, agility, and discipline will fill any gaps in declining sales.
Worried that a lack of targets will stop you from thinking big? Do what I do. I imagine that I want to make a billion dollars, and then put in daily effort as normal. Sure, I probably won’t get there, but I know that the target isn’t important. It’s showing up every day, ready to work.