What Should Your Business Be Earning?

What should your business be earning? This is a very basic question but it is seldom asked or answered. Most entrepreneurs simply believe they will succeed, earn more than they could in any other situation and then will enjoy the luxury of self-direction. This is all good but it does not answer the question, what should your business earn? I believe it is an important question, as there are ways to improve it if the earnings are inadequate.

There are other uses for your time and capital and expertise if this format is not yielding adequate return. A company must have goals and must be measured for its success and the bottom line is just that, the bottom line, the ultimate measuring point. The answer to this question is partially controlled by your vision, which evolves into your mission statement. It is here that you state your objectives, goals and aspirations. It is here that the basic foundation is established that will help determine if your business is going to be local or national, small or large. It is here that the die is cast. However, the other side of the equation is your implementation of the strategies and plans that support your mission.

Here is my equation. Yours could be larger or smaller but the format is worthy of developing. The question is worth asking and the answer is important and relevant.

1. The business must make adequate profits to retire debt as well as operate. This includes investors’ debt, bank debt, credit card debt or whatever form it takes.

2. The business must be able to pay the owner a reasonable wage based on the industry and community standards, certainly as much as one could make in other contexts.

3. The business must be able to earn enough to set aside 5-10% of its earnings for a rainy day fund, cash flow peaks and valleys, new equipment acquisitions, etc.

4. The business must make at least a 10% profit at the end of the year. Otherwise, what’s the point?

I talk to many business owners who pull a paycheck and are satisfied with that, to which I say, if you liquidated all your capital investment, collected your receivables and shut the door, what would the capital earn for you while you find a better way to earn a paycheck? I see more business owners who barely get by, taking as little cash as possible and continuing to invest their time and cash in the growth of their business, which is admirable and acceptable if the curve tells you that you are growing and will reach profitability in the defined future, but this is not acceptable as a long-term plan. It’s a poor use of resources, yourself included.

Unfortunately, many small businesses are barely able to support the owner and can reserve nothing for the future. This is a challenge as the owner wants to operate, has made the investment and wants to succeed. With all their cash tied up in the business, it’s probably impossible to liquidate out successfully so they are trapped, tied to this weight pulling them down for a long-term commitment with no blue sky at the end. I say, do something else. It’s a business, not a hobby. Invest in a program that will pay you your wage and earn you a return on your investment. Too many entrepreneurs spend far too much of their life chasing imaginary success, investing their time and efforts, receiving little in return. There are better uses of your self and your investment. One must have the guts to measure their success and make viable business decisions as to whether or not this is the best use of time, money, and effort.

Can every business achieve these goals? Probably not, at least not without more capital and a larger share of the market. Thus, each business owner is free to make the decision himself as to whether or not the business he has chosen has the ability to earn adequately to provide him with enough to satisfy his needs. Think about it, there are alternatives. You are the judge.