Let’s start with a few basic definitions.
- Gross Revenue: Also termed revenue, is the total cash that comes into your business on a monthly, quarterly, or yearly basis. It includes payment received from any means, tax returns, return on investments, and many other ways that money gets into your business.
- Net Income: Sometimes called income, simply means the amount of money available to the business after ALL of the regular business expenses have been paid. Expenses including salaries, leases, rents, tax, refunds, and every other measure that takes money out of the business. Mathematically, the net income is calculated by subtracting the expenses from the gross revenue.
- Wealth: This is usually misunderstood by newbies. It means the net worth of a person. It is measured by adding the values of all the assets accumulated by the individual over the years. These assets may include any valuables that are owned by the person (or business) like real estates, equities, stocks, bonds, liquid cash, and every valuable property.
- Lifestyle: The meaning of lifestyle seems to vary between elites. In this case, I will be referring to the definition of a lifestyle that is closest to a person’s standard of living. In this regard, a person’s lifestyle refers to the quality of their life at the moment. It is measured by considering factors like their leisure activities, hobbies, travel habits, neighborhood of residence, type of housing and quality of furnishing, cars and gadgets taste, shopping patterns, the amount of enjoyment they get out of life, and how they approach their lives in general.
In reality, business owners love to brag about three things, namely;
- Number of clients/clients
- Size of their business
- Gross revenue
The interesting thing is that the progress of a business is measured by these three factors. Some of the biggest and most successful businesses serve a large number of clients or clients which translates into an enormous gross revenue. Nevertheless, many business owners commit a fallacy when analyzing the size of their business and the number of clients.
Several times, I have met owners who report an impressive number of clients/clients, but their gross revenue report does not reflect this high client count. Somehow, they fail to recognize (or ignore) the relevance of active clients and the effects of dormant clients to the progress of their business. A business may have long client records, a record of people who have once patronized the business but fail to realize only a small proportion of those clients are actively working with you. There’s a rule of thumb that 20 percent of your clients account for 80 percent of your revenue in ideal business cases. Sadly, there are businesses where fewer than 5 percent of its clients account for almost 98 percent of its revenue. In this case, they could brag about their long list of clients but still not have matching revenue records to kindle their prestige.
Having the revenue to keep business is one thing and making a profit out of your business endeavors is another. In my experience, some businesses draw in a substantial amount in revenue but end up reporting little profit and sometimes, losses. The objective of running a business is to raise enough revenue to keep the business going and some profit to protect you and the business from a dreaded, yet inevitable, downturn in the future. This is where the net income turns out to be a crucial part of your business.
For instance, let’s review two small businesses that pull in $50,000 of monthly revenue each. Business A has 8 full-time employees, a huge office space with crushing rent that is due monthly, appliances and facilities to maintain, and some daily business expenses to cover. Business B has 3 full-time and 3 part-time employees with a moderate workspace (perhaps some of the employees work remotely), fewer appliances and facilities to maintain, and almost the same daily business expenses. You can deduce without a blink which of these businesses is reporting a better net income and which, also, is more likely to withstand a stormy phase in the near future.
However, being a business owner or self-employed professional, you sometimes have to pay attention to yourself just as you pay attention to your business. You want to live a good life, of course. If you didn’t want that you wouldn’t leave a nine-to-five to become self-employed. Therefore, it is usually expected by new owners that their business will provide the kind of life they desire. This desire, somewhere along the line, has extinguished many striving businesses.
As the owner of a small business, you have to scrutinize your lifestyle and ensure that it is not ripping your business off. It is always advisable for owners to live below their means and reinvest more money into their business. This is a difficult principle to follow. Sadly, it’s even tougher when you have an uncontrolled urge to impress.
Irrespective of personal lives, many owners want their businesses to look impressive: nice furniture, top-of-the-class gadgets, state-of-the-art facilities, etc. Well, these are good things if you are dealing with clients in person, especially advisors and consultants. Nonetheless, these state-of-the-art facilities and equipment are expensive to maintain. And to whom much is given, much is expected. If you are not pulling in more than enough revenue to maintain these facilities and pay staff, you would only be in business for as long as your capital can carry you.
Your Personal Life
You are a human being as well, who deserves to enjoy life, leisure, and vacations. Since the beginning of time, there have never been better ways to enjoy your leisure and vacations. As a matter of fact, there has never been a time when lifestyle desires piqued above what we have today. The good news is that your desired lifestyle can be supplied to you whenever you need it. It only takes a swipe of a card.
Swipe! Pizza’s ordered.
Swipe! You’re on your way to the Bahamas.
Swipe! Jet skiing on Saturday evening is booked.
Swipe! A new Mercedes Benz is on its way to your garage.
Watch the Swipes, mate. You could swipe your business out of existence.
You need to enjoy life—that is why you chose to be self-employed in the first place. But you must pay the price for the enjoyment that you seek. The more intense your desire for an impressive lifestyle, the greater the net income required to satisfy it. So, while you strive to keep your business afloat, there are a few checklists that you should keep.
- What’s the quality of your lifestyle? Do you enjoy life? Are you doing what you enjoy? Do you take time for hobbies, travel, family and entertainment? If your answers to the last three questions are negative, then you must sit back a moment to reflect on how you can remedy the situation. Although the quality of your lifestyle should stay within a satiable limit, you must create time for yourself and your family. Moreover, if you spend so much time chasing money that it encroaches on your personal life, of what use is the money actually? To get investments, real estates, and keep the kids off the street? Fair point, but you can still achieve all those without starving yourself of some personal solace.
Money is sought after for two primary purposes: first, to ensure that you have the things you need right now, the things that make living a worthwhile experience; and second, to build financial security for your future and the future of your loved ones, including your business.
- What is your net income? The amount of money left in the business after expenses have been paid is a major motivation to owners and self-employed professionals. If your expenses are appropriate and your gross revenue is excellent, you are most likely to report a net income above 20 percent. From my previous instance, if Business B fixes total expenses of $30,000 monthly, the owner would be reporting a net income of $20,000 which is 40 percent. Hilarious! A huge motivation to keep going; that is. Business A could handle a total expense of $47,000 monthly and report a net income of $3,000. Not such a motivation, you can conclude.
This is important to every business owner and self-employed professional. To stay on top of your career, you must do your best to report positive net income. The higher the net percentage, the better you will feel.
- How much net worth have you built and how much do you save? Do you have equity in your home? Equity in your business building? How are your IRA, savings, and investments? Does your SCHWAB account grow monthly or do you live week to week? Owners may brag about a long record of clients but have nothing to show for their years of self-service. Focus on accumulating reasonable net worth. That is what will matter in due time and not the emails on your mailing list.
- How much have you learned this week, month, and year? This question is the ultimate of all. At every point of our lives, we are tested. It could be a test of knowledge, a test of experience, a test of intelligence of some sort, or a test of personality. Like academic tests, we must prepare for whatever life is about to throw at us. Therefore, learning every day is a good way to prepare for an impromptu test that has no subject focus.
Inspecting Your Purchase Habits.
Many years ago, many friends and employees always made jest of my purchase and spending decisions. One of my habits was to throw a Christmas party each year at my house. It is usually a huge party at my enormous and beautiful house in one of the high-brow neighborhoods of the Denver metro area in Colorado. They always laughed because, while I threw huge Christmas parties to connect with the people I care about, I was driving an Audi 4000 with a mileage of about 150,000 miles. Yeah, you must have laughed about that too because I could have bought a new car instead of a huge party. For Heaven’s sake, who drives a heap and throws king’s parties?
I traded the car when it failed the emissions inspection, was damaged, and demanding more than its worth on repairs. Between the years that I bought the car new from the dealer at $20,000 and the year that it became totally worthless, my house appreciated over $300,000. Thus, while I threw huge parties at the house, it was paying for them and pulling significantly more than it would cost me to host another party the upcoming year.
Often we are tempted to buy things based upon the image we hope to project to friends, neighbors, business associates, and others. If you really want that expensive toy because it enhances your enjoyment on a day-by-day basis, then, by all means, get it and enjoy it. Just make your decision for you, not because of the image you hope to project or in an attempt to impress your friends. Remember, about the only thing that you can buy for yourself that has any real value after you buy it is your home. Therefore, buy it and celebrate it each year with your loved ones. You can decide to tag it a Christmas party or a Halloween party; whatever gets your wheels rolling.
Pay attention to acquiring assets that will increase in value with time and not luxury items that loses its value as soon as it leaves the dealer’s establishment. Resist the urge to impress and simply choose to stay happy.
The Millionaire Next Door, by Dr. Thomas Stanley
Financial Self-Defense, by Charles Givens