I have been reading another business book (Surprise Surprise!) and I have to say I got stuck on something the author was talking about and have had to circle the drain on this as I contemplate the challenge that the author laid in front of me.
In Simple Numbers, Straight Talk, Big Profits! By Greg Crabtree, I was presented with the idea that when you underpay yourself you are devaluing your business. Really, I got stuck on chapter one. This is there Mr. Crabtree challenged us that your profits and your salary are two different things and you need to keep them separate. When looking at the financial success of your business if you don’t give yourself a fair market salary (or at least pretend to) you are not telling the true story of your financial well being.
What he talks about is what it would take for you to hire someone in your place to do what you do. Now we all know that no one can do all that you do in your company as most of you wear more hats than is advisable, but if you had to hire someone to do the basic management would they accept the job on your salary?
In his book, Greg illustrates that you get paid a salary for what you do, you get a return on what you own. We are all so used to underpaying ourselves that we forget not only what we are worth but that to grow, we have to have room to hire people that will be an asset to us. You can always hire on the cheap, but that means you are always training and your staff if always catching up with your level of information.
I understand now, if I am not paying myself I can’t grow as a business. If I am not paying myself at least at fair market value, my business is not nearly as successful as I thought. Yes as an owner I can choose to reinvest my salary on occasion but if I never pay myself I can’t make that choice. If I always cheat myself in my salary, then I will be more likely to skim off the top here and there. Not paying yourself is like feeding off of your own self, soon there will be nothing left; you will be spent, used up and burnt out.
Your salary is part of your base operating expense, your profits are from strategic pricing, good ordering and steady sales. Take your salary and then start building profits!!!! I get it!!
Now on to chapter 2… where I get stuck again. 10% profit is the new breakeven. Breaking even in your business is like only feeding yourself enough to not die. When you are breaking even you are just barely keeping your business from its death throes. You can only do that for so long until a bump in the road sets you in a tail spin, or you need to reinvest in what gets worn and used up. When you are always running at a break even, vacation is right out.
Whatever is left over after all of your expenses, but before you pay your taxes is considered your profit, that includes after paying yourself. Even if you are not at a place where you can start paying yourself, you can look at your growing profit as a way to start “eeking” out a salary for yourself.
10% profit is considered OK for a small business, and as you grow it’s easy to lose track of your profit margin because you keep reinvesting. Trust me, it’s easy to lose track of.
That 10% profit is what keeps you above water and is your parachute when you hit that mountain size bump in the road. If you are not yet at your 10% profit margin there are really 2 directions to look: decrease expenses, increase income. It’s like losing weight; move more and eat less; simple but not necessarily easy. This first step however is discovering what your profit margin is.
In the spiritual lifestyle market there is a hesitancy to price your products at a profitable level, but if you don’t you won’t be in business for long. 2.5 x the wholesale price may seem too steep to some and not quite enough for others. In a quick formula take what your average sales are for a month, subtract your average product cost, subtract your overhead and you then get your net profits. If they are not above 5% you may have to make some fast changes. In this quick equation we haven’t even taken our depreciation!
So, why did the chapter freeze me in my tracks? I have to make some changes in my business house to get us back up to a comfort zone, all without raising prices. Us small businesses have to look at this profit margin monthly to make sure we are hustling when the time is right to pump the numbers up! When you know how your profits are trending you pay attention to little things like what products bring the biggest profit margin and start upping their sales. Maybe you look at where you have your best sellers priced, can they handle a 10% increase?
There are a lot of things to look at, a lot of chess pieces in play when you have your own business. I am always looking for more information or a problem solving piece at just the right time. Maybe I will get into chapters 3 and beyond; I am ready to fix what’s broken and need a bit of new information to accomplish that.
CEO, Founder & Enchantress
Type 40 Sales