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Is your business really making money? Or did you fall into this trap?

amp0193

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So you sold $1,000,000 worth of widgets online, and your net profit for the year was $100,000.

Pretty cool! Give yourself a pat on the back.





Actually wait.

What was your salary?

You did have a salary... right? :(






Take a step back and imagine that you wanted to hire someone to do your entire job. Doing all of the product sourcing, marketing, finances, managing some employees, vision, strategy, direction, and generally just running your entire business.

What would you pay that person?

$75,000?

$100,000?






Now look back at your net profit for the year and subtract that amount.


In the case of our example above, it turns out your business had an actual net profit of $0.


Your COGS, or labor, or overhead, or expenses, or advertising, or SOMETHING is way out of whack for your business to be making $0 a year.


Here's the thing:


>>> Your net profit needs to be calculated AFTER your salary is calculated into the expenses. <<<





Do you need to take a huge salary?

No, you don't. That's not what I'm saying. (but it better be a "reasonable" one if you file taxes as an s-corp. Thanks @MJ DeMarco)

If you don't need the business to pay your bills, then re-invest as much as you can and put in all the "sweat equity" you want. That will pay back dividends for you later.


Just don't pretend that because you're not taking any money out, that you actually own a healthy business that's making $100,000 a year. Because you don't.


When you are making 10-15% net profit after all bills have been paid, and all employees taken care (including yourself at a FULL MARKET WAGE), then congratulate yourself... and keep kicking a$$.





(gifs added so that you would scroll through a boring thread about finances)
 

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amp0193

amp0193

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For more on this topic, and others, I highly recommend the book: Simple Numbers, Straight Talk, Big Profits! by Greg Crabtree.

Very readable... you'll finish it in a day. And then you'll want to immediately read it again.
 
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Ocean Man

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I think this is due to a lack of business optics. Many don’t know how to measure the activities they’re doing... and analyze if what they’re doing is good or bad.

For example, does a person have the ability to read their balance sheet, income statement and cash flow statement and know what’s working and what’s not?

Are they using cash-based accounting or are they using accrual based accounting?

Big does not necessarily equal successful. The goal is to create sustainable success. You can be really, really, successful being really, really small. And you can go broke being really, really, big.

What I’m trying to get at and what your post mentions is measuring is important and knowing what the numbers mean and creating a plan from reading those numbers is important.

Something I’m trying to improve on.

Some books I may recommend:
- The ultimate business blueprint for an insanely successful business by Keith J. Cunningham
- The road less stupid by Keith J. Cunningham
 
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amp0193

amp0193

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Big does not necessarily equal successful. The goal is to create sustainable success. You can be really, really, successful being really, really small. And you can go broke being really, really, big.
Revenue means nothing. Show me your profit.


Something I’m trying to improve on.
As am I. Posting for myself as much as anyone else.

Some books I may recommend:
- The ultimate business blueprint for an insanely successful business by Keith J. Cunningham
- The road less stupid by Keith J. Cunningham
I doubly recommend The Road Less Stupid to everyone here. and will add the Blueprint one to my list.
 

Champion

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For more on this topic, I highly recommend the book: Simple Numbers, Straight Talk, Big Profits! by Greg Crabtree.

Very readable... you'll finish it in a day. And then you'll want to immediately read it again.
Thanks for this book recommendation, gonna check it out!

Reviews look really good.
 
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amp0193

amp0193

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You need to be teaching teachers.
I used to be a middle school teacher!

Thanks for this book recommendation, gonna check it out!

Reviews look really good.
It's a finance book, for non-finance people... hence the "straight talk" and "simple" parts of the title.

I am NOT a finance person by any means... spreadsheets burn my eyeballs... but I'm learning, because I'm done building businesses with millions of dollars in sales and not much to show for it at the end of the day.
 

MJ DeMarco

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Do you need to take a salary?
In America, actually you should, otherwise you'll get a nice little letter from the IRS with the word "audit" on it.

It's a risk if you take $100K in profits while paying yourself $0 in salary. That's a blatant avoidance of payroll taxes so you can pay the lower dividend tax rate. Such behavior will likely get you on the radar of tax authorities. Now if you pay yourself $50K and have 50K in profits, that probably won't get looked at.
 

Bertram

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So you sold $1,000,000 worth of widgets online, and your net profit for the year was $100,000.

Pretty cool! Give yourself a pat on the back.





Actually wait.

What was your salary?

You did have a salary... right? :(






Take a step back and imagine that you wanted to hire someone to do your entire job. Doing all of the product sourcing, marketing, finances, managing some employees, vision, strategy, direction, and generally just running your entire business.

What would you pay that person?

$75,000?

$100,000?






Now look back at your net profit for the year and subtract that amount.


In the case of our example above, it turns out your business had an actual net profit of $0.


Your COGS, or labor, or overhead, or expenses, or advertising, or SOMETHING is way out of whack for your business to be making $0 a year.


Here's the thing:


>>> Your net profit needs to be calculated AFTER your salary is calculated into the expenses. <<<





Do you need to take a salary?

No, you don't. That's not what I'm saying.

If you don't need the business to pay your bills, then re-invest everything and put in all the "sweat equity" you want. That will pay back dividends for you later.


Just don't pretend that because you're not taking any money out, that you actually own a healthy business that's making $100,000 a year. Because you don't.


When you are making 10-15% net profit after all bills have been paid, and all employees taken care (including yourself at a FULL MARKET WAGE), then congratulate yourself... and keep kicking a$$.





(gifs added so that you would scroll through a boring thread about finances)
You have a great gift for gifs. Where did the last one and the wrestler come from?
 
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amp0193

amp0193

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In America, actually you should, otherwise you'll get a nice little letter from the IRS with the word "audit" on it.

It's a risk if you take $100K in profits while paying yourself $0 in salary. That's a blatant avoidance of payroll taxes so you can pay the lower dividend tax rate. Such behavior will likely get you on the radar of tax authorities. Now if you pay yourself $50K and have 50K in profits, that probably won't get looked at.

Yes, absolutely must pay a reasonable salary if you're filing as S-corp.

I was more thinking of the smaller people here who may just be LLC, in which case I don't believe it's required. The profits are just the taxable income.


And even if you are taking a $30,000 salary, but you're really worth $75,000, the business is actually profiting $45,000 less than you think it is. That's what I was getting at.
 

Tommo

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For more on this topic, and others, I highly recommend the book: Simple Numbers, Straight Talk, Big Profits! by Greg Crabtree.

Very readable... you'll finish it in a day. And then you'll want to immediately read it again.
Bought it and thank you
 

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amp0193

amp0193

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Bought it and thank you
You're welcome!

I'm on my 2nd read-through right now. I don't think I've ever read a book back-to-back before.

The concepts are simple, and perspective changing.


It is way to easy to get caught in the trap of looking at the top-line sales numbers and nothing else. Thinking "grow grow grow at all costs", and never stopping to figure out if that's actually a good idea or not.
 

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