How to tell if your business is taking from you or giving you profits ?
How much should I be earning, and how can I earn more ?
That type of questions on the business owners minds demanding an answer.
Before knowing how much profit you looking for, first, what is a profit?
According to accounting, simply a profit is made when the revenue is bigger than the costs.
Of-course they would include taxes on the revenue made, but after all, it’s a numbers of revenue minus costs.
Also if the costs is bigger than revenue then that’s a loss.
For economic point of view, it’s a bit different, a profit is revenue minus the opportunity cost of scarce resources,which includes your time and money.
You might face a situation where using your resources in a certain way will make a profit now, but you might be blinded from seeing other opportunities that can a better alternative to use your resources.
Once you move from making a loss to start making profits after choosing the best alternative for your resources and risks you take, now you hit the tipping point of profit.
It’s making a profit in economic terms.
How much your business is paying you back is not the best to calculate your profit, you might be taking the majority of your business’s revenue before fulfilling its needs.
So let’s calculate how much your business should be paying you instead.
To answer that we gonna face 2 questions:
- How much would it cost someone to hire you for your alternative occupation?
- How much would it cost you to hire someone to do your tasks with the same standard you do it for your business?
The first question is much simpler to be answered if you were recently employed, or you can just check online for the hiring advertisements averages.
To answer the second question, you gonna have to calculate how many hours you work for your business on average each week or month.
Also categorize those hours by a broad category, to be able to modify and add up more stuff later on.
By doing so, you will recognize some stuff that you do because you enjoy them even it’s not the best fit for your time or efforts, and ofcourse other tasks that you do even though you hate them or couldn’t find someone good enough to delegate to.
That’s how you calculate the cost of replacing yourself with other people according to market rates.
Let’s practically do an example of having a software company:
|Accounting and bookkeeping||10|
|Marketing and Promoting your services||10|
That’s a total of 60 Hours weekly.
Now you need to calculate how much you would be paying to hire employees to do these tasks.
Let’s estimate the salaries as the following:
- You will hire on person for staff managing and accounting for 2,500 a month, that’s a 30,000 a year.
- Another person for project management for 2,500 a month, which is another 30,000 a year
- Lastly, another person for marketing for 2,500, which is 30,000 a year.
That’s a total of 90,000 a year, now if your business is making an accounting profit more than 90,000 a year then that’s called entrepreneurial profit, and if it’s not, then you’re not meeting the market rate of costs.
The profits you making above the the tipping point is for taking the risk of running a business and staying out of the employment safety.
Doing these calculations is very beneficial for you to determine whether your business is taking from you, or rewarding you profit and satisfaction.
The calculations can also go another step further, as the money you invested in your business has a desired return on investment, as a shareholder, and the risk of investment is also calculated on how easy you can pull your money back and the expected ROI.
Also the risk of employing people in your businesses affects your calculations, and since your aren’t building a social organization then there are only two reasons for you to hire:
- You can’t provide your business service or products to your customers without employing.
- A gain is expected from employing
Now you calculating the risk of employing in terms of salaries paid to the employees, extra taxes paid to
government, and also losing the direct control over the process since you’re not doing everything yourself now.
Your business exists to serve you, not the other way around, so you need to calculate the following to know where you stand:
- Current profit before paying the owner
- Profit tipping point ( includes time and money and risks taken )
- Your Ideal profit
Your ideal profit is what your really need your business to make according to the your business industry standards and conditions, which typically provides you with the financial quality of life you want.
If your current profit is lower than your profit tipping point then your business is actually taking from you.
If your business is currently making more money than your profit tipping point, then that amount is an entrepreneurial profit for your efforts and risks taken.
The gap between your ideal profit and your profit tipping point is your idea entrepreneurial profit for your satisfaction.