Entrepreneurs: Here’s the Best Method to Help You Get Your Money Right
A few years ago, I was called in to help a young tech startup with some important business strategy. They were looking for help with their marketing, and when I found out they had received $350,000 in seed money, I was excited.
They had developed an app; something to do with the restaurant industry, and they needed help marketing it. It was just two guys, a developer and a business grad. They were friends from college, and ready to make their mark on the Toronto tech industry in a big way.
When I got to their surprisingly lavish office, I assumed they had already made a ton of sales. I asked where they were putting their seed money. Apparently, they figured having a “tech mogul” office and renting a company Lexus were the way to go. I asked about their marketing budget, and they were reluctant to get it as high as $10,000.
The rest, they said, was for “branding” …a term too often used to mean “giving ourselves a lavish lifestyle.” I was shown the door when I suggested they should be running the company out of their dorm room and spending at least $140,000 on marketing.
The company no longer exists. Their project died, because nobody knew who they were. It seems driving a Lexus doesn’t mean anything if restaurant owners never see you pull up to the door for drop-in meetings with people they’ve never heard of.
So, if you’re an emerging, small, or sole operator business, how do you decide what to do with your money? Even better, how do you decide what your sales targets should even be?
My recommendation: the 4-3-2-1 method. Here’s what it is:
4: 40% To Your Business
If you’re serious about growing your business, the bulk of your startup and early sales capital should be going back into your business. I actually recommend 40%, at least until you reach a level of success and comfort (comfort is important!) where you can scale back. That 40% can be on supplies, staff, shipping, or whatever. But early on, I strongly recommend you focus on marketing. Marketing is all about making sure your best customer knows you’re there. If they don’t, nothing else will matter.
“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” —James W. Frick
3: 30% To Taxes
It seems odd to think about pre-paying your taxes. But if you assume a fairly conservative 30% tax rate on your earnings, a couple of nice things happen.
First, you won’t be stuck with any unpleasant surprises should your bookkeeping not be up to par. Getting stuck with a five-figure tax bill when times are lean is not something you want to come out of the blue.
Second, assuming you’ve spent 40% of your earnings on actual business expenses, there’s a very good chance (though not a guarantee) that, in the worst case, you won’t have to pay any additional taxes. In the best case, you might actually get that money back as a hefty refund next year…which you can then roll back into your business (using the same formula).
2: 20% To Investments
If you’re not investing, you’re not earning tomorrow. The thing is, over the long term, your business needs to own more than just the stuff in the office. Treat your business as your life, and you’ll get the bigger picture. By placing 20% of your earnings into diversified investments, you increase your business income. It’s also great protection: if times get tough, you’ll have capital you can sell to get you through.
1: 10% To Yourself
I’m talking about top salaries in general here, but for the home-based or solopreneur, this is what will guide you to your sales target. If you’ve decided that you only want to sell $1,000 a month in services, but you allocate $100 to your own earnings, you’re not going to get ahead very quickly.
For myself at my stage of life, I would be comfortable with, let’s say, $5,000 a month in personal income. That means my sales targets for this coming year should be on the order of $50,000 a month. That’s doable in the fields I work in, and as long as I’m spending (in this example) $20,000 (40%) a month on marketing, quite achievable.
If you’re looking to take home $10,000 a month, your sales targets should be on the order of $100,000, according to this method.
Now, remember that $100,000 a month is a pretty lofty goal for some people. But targeting that 10% for personal earnings is a good way to see how much you need to get by. If you’re able to meet your obligations on $1,500 a month, then aim for $15,000 a month in sales.
“Many folks think they aren’t good at earning money, when what they don’t know is how to use it.” —Frank A. Clark
By the way, $100,000 a month in sales, following this method, means you’ll be spending $480,000 a year on marketing your business, pre-paying $360,000 in taxes (imagine THAT as a refund!!), and investing $240,000 a year for growth.
And, in theory, you can repeat this with your own income:
$10,000 per month means:
$4,000 in “business” (household) expenses;
$3,000 in taxes
$2,000 in investments
$1,000 in money to play with
Only as an example, of course.
Remember, if you’re unsure of where to set your sales goals, whether in your main business or a side hustle, figure out first how much you need — or want — personally. Make that number 10%, and you’ll have your overall sales targets. Focus your earnings on business building and long-term growth, and that 10% figure will compound considerably.
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