Today we’re breaking it all down and talking about the numbers. We’re going to talk about exactly what it means to have a six-figure business.
If you happen to catch last week’s episode on a big enough business then maybe you went through the process I shared with you to figure out what size your big enough business is and there were really two parts to determining the size of your big enough business.
It is a perfect size for you so that you can enjoy your life right now. This is a jumping off point. It doesn’t mean your big business can’t grow.
And in last week’s episode, I talked a lot about the growth trajectory my big business has gone as I’ve grown as an entrepreneur as I’ve transitioned different life stages and things have kind of shifted and evolved for me personally.
And one of the things that I always tell people to come back to when they’re trying to figure out what size business makes sense for them is:
How much time and energy do you have available for your business?
While there are some people who have the time and energy to work 80 hours a week and they have no major obligations.
Once you get a little bit further along in your life journey that might change and maybe you no longer have 80 hours a week maybe you just simply don’t have the energy.
Maybe you’re dealing with some health conditions or some challenges. If you’ve got kids or aging parents you’re taking care of like not all of us have that time available to work like that in order to grow our business.
So that’s a big piece of a big enough business is what’s your bandwidth, how much capacity do you actually have. And the other part of it is how much do you need in order to sustain yourself.
How much do you need to take home to pay yourself from your business?
And this is an important question to ask yourself and this leads us to our conversation today diving into the numbers the math behind a six figure business.
Often what I hear from people is they crunched the numbers and they think “OK my last salary was $40,000 a year so that’s what I want to make in my business my business needs to make $40,000 a year.”
Make sense, right. Not so much.
$40,000 a year in top line revenue. So total of what your business brings in does not equal what you take home and pay yourself. And if you’ve been in business for a while you know that you realize that it costs money to run a business.
You have to pay taxes to run a business. What you pay yourself is often just whatever is left over. And that means people who only set the bar for a $40,000 business or a $50,000 business thinking “well that’s what my salary was are. That’s comfortable enough for me. I don’t need to ask for more.”
You really want to double that to reach your business revenue goal for the year.
Now I’m going to share with you guys things that I learned from an incredible book called “Profit First”. Basically it goes something like this.
Most people’s profit is what’s left over at the end of the year after they’ve paid for everything else. And that’s why they don’t have any profit in their business their business doesn’t actually have any profit left over.
But in his methodology you put profit first. You take out your in the case of a six figure business. You’re going to take out your 5 percent profit first. You pay that out first and then you come down and you start cordoning off the rest of what’s coming in.
- 5% PROFIT FIRST
- 15% goes to taxes
- 30% goes to operations and operations means whatever it costs to run your business
- 50% is owner pay
You’re going to have expenses, you’re going to have to pay taxes, and ideally you’re setting aside a little chunk every single month for profits. And that way you can get a couple of things you can reinvest into your business.
You can give yourself a nice bonus every quarter or every year. I mean there’s your trip to Disney. There is your renovation for your kitchen.
You know when you are looking at this perspective, it really changes the game and lets you know how much you can spend in these different areas of your business.
Let’s go into breaking these numbers down and actually looking at what that percentage breakdown looks like.
Well again a lot of people who are like well I just think $50,000 or $40,000 they’re thinking in terms of maybe their last salary their last take home salary. So here’s the problem with a 50K goal as your revenue. I’m not saying it’s a terrible goal.
I’m saying you need to know what the numbers look like as a business. So that means you have for your profit that’s $25,000. You’re going to be paying somewhere around $7,500 for taxes.Then you have about fifteen thousand dollars for operations.
$25,000 owner pay a year that is not a lot to be sustaining yourself honestly. And if you wanted to break it down even more, I did a quick calculation that was based on if you took four weeks off the year.
You are working 48 weeks a year and then you were averaging 25 hours a week which is when a lot of people I talk to that that’s what they have available. That means you’re really getting paid about $20 an hour.
For all the work that you’re putting in you’re getting paid about $20 an hour. That could be a little tough to swallow and honestly not very sustainable for a lot of people especially if you are a dual income household.
That is the reality for so many of us dual income households. Like most people, it takes two people to work in order to sustain a comfortable lifestyle. It might not work for you if you know you have other obligations.
I remember when all three of my children were in preschool There were some months where I was paying nearly $2000 a month just for preschool.
I would be earning $50,000 a year, just to pay $2000 a month in preschool and not have a whole heck of a lot left over.
That’s why I say we have to start getting really realistic about this and understand what the numbers look like so we can understand how to set the right goals.
Let’s look at if you are aiming at the actual six figure number so you’re going to break $100,000 this year.
That’s your goal and this is what we’re talking about the numbers of $100,000 your business in might seem unattainable. And yes the statistics show that a very small percentage especially of women business owners actually hit that hundred thousand dollars a year.
In fact that can be as little as I believe it’s 12% of women business owners only hit $100,000 or more a year.
So what does that look like from the profit first perspective?
We’re looking at 5% profit. That means we’ve got $5000 in profit. That means at the end of the year you pay yourself half of that you reinvest half of that back in your business it’s your business slush fund.
Wouldn’t it be awesome to write yourself a bonus check for twenty five hundred dollars. That’s a vacation.
You pay taxes, so you can expect to be doing about $15,000 approximately. You have operations costs of $30,000. Now we’re talking about getting to the area where you can actually afford to get some help.
I mean with $30,000 available in your budget to invest into the right technology to use the right tools in the right gear and the right equipment to have people who can help you.
You could very easily have one or two people on your team helping you part time and only pay like five hundred thousand dollars a month. We talked about this all in the Dream Team Episode of Uncomplicate Your Business.
Then you know then you get that 50% take home. And this gets you closer to where a lot of people were saying their their business revenue goal was which was to replace their original salary.
Now we’re talking about a $50,000 salary and you can see these percentages they work in Profit First. First, he actually breaks down these percentages are what he has seen after working with consulting.
Probably hundreds of thousands of businesses are doing the research around it. These percentages work all the way up to a $250,000 a year business.
How do you figure out what you should spend on your business in order to get it running?
And this is one reason why I think $100,000 your business makes sense for so many people as their goal because it’s actually is enough to give you that take home revenue you need.
Now we’re getting closer to actually paying you what you really deserve. And on an hourly basis this is where you’re getting closer to a $40 an hour. This is where I think a lot of us can start to raise our level of our “big enough business” a little bit higher.
[clickToTweet tweet=”I’d love to see more women entrepreneurs be part of that 12% who break the 6 figure mark.” quote=”I’d love to see more women entrepreneurs be part of that 12% who break the 6 figure mark.” theme=”style2″]
It will lead to more sustainability that will lead to being able to get more support. It will lead to being able to invest invest in the right tools and the right systems and the right structures.
Believe it or not you will probably work less in this $100,000 business than you would in a $50,000 a year business mainly because now you have funds available to get out.
And that’s just not possible when you don’t have the bandwidth available in your budget. So let’s look at one more thing I want to show you guys. And I’m just going to bring up a whole new little piece of paper and this is the math of you know now.
Now are you going to see the numbers and how the percentages work out.
You’re probably thinking to yourself “OK well how do I do that, because right now it just feels really overwhelming and not possible for me.”
Well I’m here to tell you it is actually possible for a lot a lot of people, especially if this is the women that I I tend to work with most if you are a service provider.
So let’s look at the math of a six figure business. Real quick, because this is one that I think can confuse a lot of people and make you feel like it’s just not possible I can’t do that.
You need to look at is what are you offering and what are the price points you’re looking at. The challenge with a business it’s not offering the right products and the right services at the right price point is you set yourself up to work way too hard.
And in this current entrepreneurial space we hear a lot of people who say something like this. Start off with a $50 product then you start building out a hundred dollar product and then maybe eventually you get up to creating a thousand dollar product. That’s where a lot of people tell you to start small.
Well here’s where that’s a challenge is in order to make any of these six figure business on their own. How many people do you actually have to sell in order to get that.
- You have to sell 2000 of that $50 product
- 1000 of that $100 dollar product
- 100 of that $1000 product.
So my question back to a lot of you guys and for you to really think about is “could I sell that in any given market” where your businesses is for a lot of people the answer is “No”.
The reason the answer is going to be no is because you have to understand some more math. We’re going to go on a 2% conversion rate on industry average. The average is 1 to 2%. So maybe one or two percent of the people who hear about it are going to buy it.
That means if you need 2000 sales of that $50 product, you need to get it in front of one hundred thousand people 100,000 people.
If you were looking at $100 products you still have to get in front of 50,000 people and even for a thousand dollar products that you’re trying to make 100 sales that year you still have to get that in front of 5000.
That is a lot especially if you don’t have a ton of traffic to your website, especially if you don’t have a massive e-mail list, especially if you’re in the first couple of years of your business like let’s just get real.
I rarely see people who come out the gate with thousands of people on their e-mail lists unless they’re coming from another business or they just happen to already know a lot about online marketing and list building etc.
Instead of going for a high volume model let’s flip it around and let’s look at a lower volume model. Let’s look at something that’s $2500.
$2500 was the first price point on any coaching I offered it was six months to work with me one on one. Every other week it ended up for over six months.
It was something like 12 sessions one on one that are hour hour long class a two hour deep dive session. So a total of 14 hours plus you know some extra in-between helping checking in email coaching etc.
But it was $2500 or $500 a month. That was my first coaching package and it was really helpful because it meant I just needed to enroll 20 people in January and then another 20 people mid year and suddenly I hit six figure mark.
Maybe for you this might seem really really high. It might seem like I don’t know if I have anything I could offer for twenty five hundred dollars. Is that too big of a package or a service.
You have to really think about this because the math works. And honestly if you are an expert if you have a lot of experience if you have expertise chances are you can come up with something that’s going to be around the $20-2500 or $5000 price point.
$5000 price point really works well for people who are makers. So people who are creating web sites are doing photography etc. etc.. If you’re delivering something it can feel a little easier to actually reach up to that $5000 price point.
These aren’t going to be numbers that are coming out from a online program out of the gate.
Unless you have a ridiculous amount of experience and expertise online for most of these these are going to be a range around for doing a service. And, when you break down that conversion rate how many people do you need to get this offering in front of.
But with that using that same 2% conversion rate so we’re still comparing apples to apples and apples to oranges.
If you are just to promote this via glitzy online marketing and an email list and social media then we’re talking about a $2500 offering that you’re trying to get 40 people into getting a list of 2000 people$5000 you’d need a list of 1000 people.
Now the cool thing here guys is when you start looking at how you can really get the most out of offering your higher end programs and higher end services is this 2% is actually not correct.
Let’s say doing websites for people and that’s your business, you’re a maker you’re actually delivering a product then you know usually people are going to talk to you they’re going to come to you more high touch not via a email list and so chances are you’re going to have more conversations with potential clients.
Usually we see up to a 25% conversion rate. So that means you don’t really need a big list in order to sell 20 people into a 25 $100 offering because you’re usually talking to them in a more high touch way which converts much much higher.
And I have to say, in order for that to work you just have to be willing to have conversations and know going into them knowing that one in four people is probably going to sign up for this.
As you get better at those conversations, as you get better at positioning you’re offering as you get better at filtering what you’re doing and really helping the right people take that next step to getting on the phone with you.
You’ll maybe even see that go up to you know 50% or higher people getting on the phone and signing up to work with you. And same thing for this other number here.
So instead of needing 1000 people, you only maybe need 250 people.
You can start to see how the numbers work here and why it is possible to get to a six figure business much faster when you focus on higher end offerings.
These are going to be more like services or more high touch programs. I mean the coaching program or a teaching program these are going to be higher end and its actually one of the best ways to build a solid baseline revenue and to set yourself up for success in the first couple of years in your business.
I have seen with my clients that when they start this way with more high touch and with higher price points what they also do by getting these clients in and building in the revenue that they need they give themselves a runway.
A runway where they can now figure out things like:
- how do I build an email list?
- how do I create an online program?
- how do I create a group coaching program?
- how do I launch something for the first time?
It is a lot easier start with high touch offerings programs and services because that’s what we naturally all know how to do.
Going into these leveraged and passive offerings sounds great but I often see that it really takes a couple of years for people to figure out enough of all the moving parts of that in order for those to become six figure businesses.
Don’t go into business thinking that you’re going to build a six figure business on a $50 product or a $100 product unless you have a large email list or you’re amazing at generating traffic or you’re already skilled at selling things at scale.
CRUNCH YOUR NUMBERS! Using the Profit First percentages, how big is your big enough business?
- 5% Profit First
- 15% Taxes
- 30% Operations Expenses
- 50% Owner Pay
Then take a look at how much of your offering you will need to SELL this year to achieve that goal. Do your offerings align with your goal – or is it time to tweak your business design plan?