Well-meaning and excited people tend to go into entrepreneurship for more “freedom” and money. In my experience, they don’t get NEITHER freedom nor money for several years AFTER their business launch.
In fact, most don’t write themselves a consistent paycheck for years!
Drat.
This partially explains why 75% of small business close their doors within their first 5 years of operation. And why 90% are gone in 10 years.
I wish they had taken the time to calculate their “freedom and money” number BEFORE they opened for business. It may have changed the outcome. They would have had clarity.
Your freedom number is the amount of income your business needs to generate in Sales to fully satisfy your living expenses and those of the business. Once you achieve this amount of Sales, your business becomes an “employer” and it provides you a paycheck.
Otherwise, why bother?
Follow these simple 4 steps to set a monthly Sales Target:
STEP 1: Let’s start by calculating your PAYCHECK NUMBER.
Calculating your PAYCHECK number is easy. It is the average amount you spend on a monthly basis. If you are organized, this will take as little as 10 minutes to discover. If not, you may need to spend a couple of hours pulling together records of your various spending outlets. Either way, the time invested here is well worth it. Here are the steps to calculate:
Figure out how much you spend on a monthly basis. Look back at all of your spending mediums for the last 12 months—including bank statements, credit card statements, debt payments, charity donations, etc.—and try to remember any cash transactions as well. Note: This is why I try to never use cash. It is untraceable!
Put them all into a single spreadsheet. Aggregate all of the transactions you have made in the last 12 months into a single Excel spreadsheet.
Divide by 12. Take the sum of all of the transactions you have made in the past 12 months and divide it by 12. Assuming no drastic life changes, this is your average monthly spending, otherwise known as your freedom number.
Let me give you an example. Let’s assume Business Owner Jane Smith looks back at all of her PERSONAL transactions over the past year and determines that she spends approximately $5,000 each month to live. Once her business generates AT LEAST $5,000 per month, PLUS what the business needs to run, she can take a “paycheck”.
The next vital step is determining what the business needs to “live”.
STEP 2: Calculate the business’ LIVING EXPENSES:
Repeat the same process for all your business expenses. Go to your business bank accounts and business credit card statements and enter the totals into a spreadsheet. Add up everything and divide by 12 and you get an average monthly spend number.
In the example above, Jane Smith’s business spends, on average, $3,000 a month.
Now you are ready for step 3.
STEP 3: Business’ Sales / Revenue Target Number:
Take the amount of money YOU the owner need to live (Step 1) and add the amount of money your business needs to live (Step 2).
Using the numbers from Step 1 and 2, you get a preliminary target number of $8,000. Caution: you are still not done! Now you have to consider PROFIT.
STEP 4: PROFIT
Estimate how much CASH profit you would like to have in a bank account at the end of the year. Profit is the reason you went into business. If all you wanted was a paycheck, you could have applied for a job working for someone else. Entrepreneurs make money and KEEP profit. How much PROFIT do you want to have?
For the sake of this exercise let’s assume you want 10% PROFIT. So, add $800 to the $ 8,000 for a MONTHLY Sales Target of $8,800.
STEP 5: TAX
You will have to pay tax on your PROFIT, so be sure and factor in another 20 to 25% of your profit to to cover it.
20% for Uncle Sam on $800 = $160.
STEP 6: LET’S PUT IT ALL TOGETHER
Here is the final calculation:
Business Owner Paycheck $ 5,000
Business’ Living Expense $ 3,000
Desired Profit $ 800
Estimated Taxes $ 160
Total Monthly Sales Target $ 8,960
Where are you in your business? Are you still trying to get to a steady “paycheck”? Or are you making some profit and want to make more?
THIS IS WHERE THE BREAKTHROUGHS COME!
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