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Overview
If you are a business owner, your business is probably doing well and growing. However, you should not focus on revenue and maximizing sales. Instead, borrow money to hire more employees so that they can take all the orders possible.
While it’s true that revenue is important, spending more than you earn will lead to ruin. It doesn’t matter how much money you bring in if your expenses are greater. Therefore, the right strategy is to focus on profit and not revenue.
In this article, you’ll learn why business leaders should pay themselves what they deserve; how to avoid debt; and how to pay your employees like an NFL coach would.
Big Idea #1: Business owners should always pay themselves the correct market wage.
Surprisingly, 90 percent of small business owners pay themselves less than a fair market wage. This is because they can make their profits look better by paying themselves less.
Despite the fact that business owners should pay themselves appropriately, they must still pay themselves a market wage. There are two reasons why this is necessary. First, not paying yourself enough will hurt your company’s profitability and ability to grow in the future. Second, if you don’t set an appropriate salary for yourself, it could negatively affect how much money you make down the road.
It’s also important to note that the U.S. Internal Revenue Service has included underpaying wages as one of their “dirty dozen” tax scams used by closely held (or S) corporations. The IRS is increasingly choosing to audit firms suspected of using this practice, so it’s crucial to pay yourself a market-based wage if you want your business to be profitable and sellable in the future.
When a potential buyer looks at your business books, they will see that you’re paying yourself very little. This could make them doubt the value of your company. Alternately, if you pay yourself market wages from the beginning, it won’t matter what happens in the future—you’ll still be earning enough to live off of as long as you decide to sell and replace yourself with an outside CEO who’s expecting market-based wages.
Big Idea #2: Focusing on healthy profits will guide your business through its critical adolescent years.
Every business experiences a moment when it’s generating more revenue than it can afford to pay for staff. It is at this point that the firm risks falling into a black hole, which is defined as an unsustainable situation in which there are too many demands on resources with not enough capital to support them. In order to escape from this scenario, you have to aim for 10-15% pre-tax profitability.
It’s like a pioneer trying to go from Kansas to California in a wagon. Even if you stock up on provisions at the beginning, if you use them too quickly without adding more as you go (or incur losses but don’t build profits), then it won’t matter how much stuff you had when you started out.
To get through a black hole, you should focus on growing your business while making healthy profits. This will help you grow even more when the market improves. Furthermore, if you want to sell your company, having a history of profitability will make it worth more.
Businesses will want to see your profits and net worth over the last three years. This is because they use these numbers to determine how much a company is worth. If you have 10-15% profit, then you’ll be valued more than if you had none or very little profit. So, do you want your business to be valued at its optimal market value? Of course! Here’s how:
