This one might sound simple, but the reality is it’s one of the most overlooked components of any business.
Many entrepreneurs assume that just because their business earns, for example, $2 million in revenue, they will have enough money left in the bank to meet their personal income needs.
However, you need to understand your income requirements first and foremost before you start working towards a specific revenue target for your business.
The same rings true if you are an employee; you need to understand how much value you are bringing to the business and the subsequent volume of profit you are responsible for generating.
What is Your Income?
Simply put, your income is the total amount of money you need to earn – inclusive of tax – to pay for:
- Your mortgage or rent
- Food, clothes, incidentals
- School fees, home maintenance costs
- Entertainment, holiday’s if that is your thing
- Savings, investments, personal development
- Cars, travel costs, etc. if you are unable to claim them on your business
- Anything else you need to pay for to live!
I call it my personal break-even point.
So, the amount of money I need to meet all my personal (non-business) expenses to live and fulfil my homes financial requirements.
Figure 1 below sums it up nicely.
Now let’s run a hypothetical scenario here. We will use David.
David has a family of 5 with three kids under 12, and he also owns a tutoring college with three staff.
David also recently bought a new home as his business has grown, thus giving him more choice in his personal life.
Using the 7 points above, David has calculated that his annual break-even cost, which includes $39k per annum towards savings and investments, is approximately $300k of personal income.
That $300k gives David all the cash he needs right now to live his ultimate life and enjoy a healthy balance with his family, mental health, and finances.
His business did $1.2 million in revenue this year, the first time he has broken through the 7-figure mark.
So naturally, he is super excited about this, as he should be!
After he has paid all his business outgoing’s, such as suppliers, plant equipment, and staff fees, he only has $200k left for himself, which is $100k short of his income requirements.
Figure 2 gives us an overview of where David is at.
The $300k goal that David has set himself takes care of his tax, mortgage, savings, and family commitments.
However, as we can see from figure 2, he is currently in a deficit.
Houston, we have a problem!
The Problem with Looking at Just Revenue
We can see here that although earning a million dollars plus revenue per annum was looking good from the outside, that it still fell short of generating the income that David needed to live his ultimate life.
He now needs to find a way to generate an additional $100k in income for himself, which may take $200k of additional revenue after expenses to realise that.
Now the power of John knowing this gives him clarity on the type of revenue his business needs to generate to facilitate his personal goals.
This is powerful stuff for you as the savvy, hustling entrepreneur or driven corporate career type that you are reading right now!
I recommend you undertake this exercise yourself because once you know this, you can create or evolve your business model or career path to meet your personal needs.
How you Can Improve your Income
Once you have done the exercise above and identified your shortfall, you need to focus on your new target.
Some strategies that you can deploy include:
- Audit any revenue opportunities you are currently leaving on the table. Such as partnerships, referral schemes or maybe it is the simple stuff such as marketing, your sales conversion rate, or the number of new leads you call per day.
- Get crystal clear on where people who buy your product or service typically find your type of business. Instagram, LinkedIn, email, Facebook, shopping centres?
If you know where they generally come from, you can start to allocate resources to that aspect of marketing within your business.
- If you, for example, find out that Instagram is the primary medium your customers use to find your type of business, yet you have no expertise, a faster solution maybe finding a consultant or expert to help you focus on what you are good at.
Sure, you can learn over time, but I have found that hiring experts can help get some real-time paid education from a subject matter expert on that topic and remove the amount of time taken to turn that weakness into a strength.