Know What You Need to Earn
Listen in here, or on your podcast player of choice.
Or read the episode as an article below:
Even if it seems gauche, start with understanding the money your business needs to bring in. This act alone will make you different than 99% of people who start small businesses, and will make you much more likely to have a successful business in the long term.
Most people start with the fun stuff (and I have for sure been there!): what your passion is, what your mission is, what wonderful things you want to create with your work. Maybe some yummy logo design or a marketing how-to course...
This is exactly how we wind up trying on tactics without having any clear direction first of what the business needs in order to sustain itself.
And if you’re thinking, “Yeah but my business is just me...” Even if your business is so small that you’re the only person in it (most of the businesses I work with are solopreneurs and freelancers), you still definitely need to begin with understanding what you need to earn.
In 2009 the Max Planck Institute did a study that examined the walking trajectories of people who walked for several hours in the Sahara desert in Tunisia and in the Bienwald forest area in Germany. (Stay with me, I'm going somewhere with this I swear...)
What they discovered is that people could not keep a straight path when the sun or moon were not visible, and they all (all!) walked in circles, thinking they were walking in a totally straight line.
Marc Ernst, a Group Leader on the study added: "The results from these experiments show that even though people may be convinced that they are walking in a straight line, their perception is not always reliable. Additional, more cognitive, strategies are necessary to really walk in a straight line. People need to use reliable cues for walking direction in their environment, for example a tower or mountain in the distance, or the position of the sun."
Knowing what your business needs to earn is your reliable cue to know whether you are making progress, or walking in circles. Spend enough time hanging out with entrepreneurs and you will hear everyone's "walking in circles" stories. We all have them! If only someone had told us that we need the reliable cue of what the numbers are doing to act as our GPS.
This is not because money is everything either in business or in life, for sure it is not, but without money, aka revenue, you don’t have a business, you have an expensive hobby at best and a giant debting machine at worst.
Everyone has different financial situations; If you are a sole earning single parent, you’re going to have different needs than someone who has a co-earning spouse or who is financially independent from past earnings or family money.
When I work with people in Simple Prospering, we take the time to figure out what your specific financial situation is and what your financial goals are, (and I have the Healing Arts Practice Incubator finances course coming out soon, so you can hop on the waitlist to be notified at healingartspracticeincubator.com). But in this essay, because we aren’t looking at your specific situation, here are some big picture ways you can understand what you need to earn:
(Side note: I also don’t subscribe to “more more more” when it comes to money, so wealth hoarding isn’t a goal as far as I’m concerned. But neither is noble poverty.)
First, what do you need to pay yourself? Don’t ballpark it. Take some time to look at what your monthly expenses are. The rent or mortgage, groceries, utilities, car, gas, etc, etc. Really look at all of it and get to a number that represents your regular monthly expenses.
Now that you’ve figured out the number of your typical monthly expenses, add 10% to 20% to that number- depending on what you know about your own financial situation and if you often find you come up short.
This additional percentage is added on because, on average, people fail to consider their true living costs. Paying for new car tires, getting the driveway re-paved, holiday gift season, summer vacation costs, the surprise vet bill... things cost more than we expect them to. If we don’t want to wind up debting because we are caught short, we’re going to have to build a business that can pay us what we need it to pay us. So know your number: your typical monthly expenses and then add a bit.
That’s just your pay. Whether you run a small business with a few employees or are a solo self-employed person, the amount you need to pay yourself is not the amount your business needs to earn.
Your business also needs to pay for its own overhead (this does not come out of what you pay yourself), its taxes, and enough in operating expenses to also have savings for sick and vacation pay as well as money to grow when an opportunity comes your way- like a certification you want to get, a new team member you want to hire, etc.
Since we aren’t sorting this out with your specific details, again you can use broad percentages:
If you run a one-person business (meaning you’re the only “employee”), take the number you figured out that you need to pay yourself and double it. That’s the number that your business needs to bring in monthly. In the smallest of businesses, the percentages usually look something like this:
Owner’s compensation (i.e. your pay): 50% Operating expenses: 20% Taxes: 20% Profit: 10% Profit can also be thought of as business savings, or what allows you to cover sick and vacation pay, and to prepare to invest in resources that can help you grow.
If you run a business with a small team of employees, you will be taking a smaller percentage of the total revenue for your pay, because you are also paying team members. While this can certainly take many forms depending on how many employees you have and your particular business, you could start with taking the amount you figured out you need to pay yourself and triple it to get to the number your gross revenue should be.
Or you can play with percentages based on what you know you pay your team. If you want a place to start playing with numbers, some example percentages for small businesses with about 2 to 5 employees would be:
Owner’s compensation (your pay): 20% Operating expenses (including paying your team): 50%
Taxes: 20% Profit: 10% (Safety net savings)
Hate starting with percentages? You can instead figure out what your business expenses are, do the math on the number of sick and vacation weeks you want to cover for yourself, and add in the tax payments you usually make. Once you have these numbers, you can see more clearly what the percentages actually are for you.
If you take the time to do this work and to get those numbers down, they become the compass of where you need to get to so that you can sustain yourself and your business can sustain itself.
Here are some action steps you can play with to start having a better compass point of knowing what you need to earn:
Write down your numbers and post them somewhere you can easily see them, like a post-it note by your desk:
What I need to pay myself every month:
What my business needs to earn every month: (this should include taxes and safety net savings)
Adding these two numbers gives you your target gross revenue, meaning, all the income your business brings in total.
And if there’s a gap in where you are to where you want to go- you’re not alone! Also write down:
This is where you are headed. You are getting there step by step.
A reminder that you can get the ebook version of this, and all 6 other building blocks, here. And if hearing all those percentages in a podcast episode made your brain draw a blank, I do have the healing arts practice incubator (HAPI for short) finances course coming out soon with spreadsheets that will do this math for you.
In the next essay I will discuss how to take stock of, and better understand, how your strengths and your clients’ true needs fit into what you do and how you deliver your services.
