Plan to make 3x more than you want to take!
Practically speaking, most people go into business for two fundamental and important reasons:
- to have control over the business
- to make a profit (from which you’ll pay yourself income)
While many programs work very hard to sell you on how easy it is to create a six-figure income from your business (and trust me, it’s not easy but it can be done), I haven’t seen a single one (other than ours) explain that what you make in your business and what you can take out from it are two very different things.
However, there is a simple formula you can apply known as “the rule of 3” to help plan appropriately for this reality.
For example, if you want to take $100,000 out of your business for personal income over the course of the fiscal year, you’ll need to set up revenue streams capable of generating 3x that amount (or $300,000) before year end.
Conversely, if you are certain you can generate $100,000 in your business for the current year, then you can reasonably expect to keep $33,000 of that for yourself.
Yes, for every $ you want for yourself, you’ll need to make $3!
Here’s how your hard-earned revenue dollars break down:
$1.05 tax reserve (35%) — this is one mandatory item people forget to plan for
$0.60 marketing and promotional expenses (20%) — web sites are not free and you must do more than just have a web site to build a business
$0.36 operating overhead, including cash reserve (refunds) and bad debt allowance (12%) and then
$0.99 left for you (33%).
Don’t worry! There are many ways of working the numbers favourably into your pricing models if you know the formulas for that. And, since the typical business owner struggles with how to value and price products and services, we explain the process in the SMARTSTART Guide to Pricing.