Up to now, I’ve avoided talking about ways to increase your business’ gross income. You may be wondering why.
I have worked with numerous business owners over the years who focus exclusively on their sales total. These business owners tend to believe the higher their total income, the healthier their business. While that’s not completely wrong, it only takes into consideration part of the picture.
The danger here is that the business owner who focuses just on total income often convinces himself the next big sale will solve all his financial woes. The outsider looking in can see all the areas the business owner could be managing his money better, but the business owner tends to be blind to this. For this reason, ways to increase total income is one of the last areas I target when working with a new client.
There are times, though, when a business is running as efficiently as possible and is still either not profitable or not paying the business owner a living wage. This is when we need to look at ways to increase total income.
When is it time to focus on top line growth?
As I’ve mentioned before, I am a huge advocate of the Profit First cash management system. Profit First has specific guidelines on what a business owner should pay himself based on his business’ real revenue level, where “real revenue” is defined as the income a business has after paying for cost of goods and any other material or subcontractor costs that go into the delivery of the business’ product or service. Most of the small businesses I work with fall into the $250,000 to $500,000 real revenue range, which means the business owner should be paying himself around 50% of real revenue in salary or regular draws.
Is your brain swimming? Look at it this way: if you need to earn $100,000 per year in order to maintain the lifestyle you want, your business should be bringing in at least $200,000 per year in real revenue. If your gross profit margin is 50%, then your total revenue should be around $400,000 per year in order to pay yourself your living wage, ensure your taxes are accounted for and that you are able to set aside money for profit and growth, and operate your business.
Reverse engineering your salary is a great way to determine whether you need to increase your business’ gross earnings. Otherwise, you may find yourself in a bad money relationship with your business.
The methods to increase your business’ gross revenue range from boring and reactionary to clever and proactive. We’ll look at some of these methods in the coming weeks. Until then, take a minute and determine what percentage of your business’ real revenue is coming to you in the form of salary or draws. Is it higher than it should be? Then it may be time to consider growing your business.