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  • Aspire » Finance

    13 Oct

    Happy man with money

    When you’re heads down running your business, it can be really challenging to get some perspective on how things are going…even something as straightforward as how much money you should be making.

    We presented last week for Enterprise University – our topic was “Do You Own Your Business…or Does Your Business Own You?” (catchy right?). The focus of the workshop is about identifying those fundamental areas of your business that have to be right if you want to successfully scale.

    One of those key areas is Money. Unless you happen to have a finance or accounting background, digging into your financial numbers likely isn’t one of your favorite things to do. If that’s you, you’re not alone. However, it’s critical you have a basic understanding of how your business actually runs. You’ve got to understand how (or if) you actually make money.

    One of these key financial ideas that comes up frequently is the question of how much money should a business owner make…both in terms of salary and profits. Unfortunately the most accurate answer is “It depends.”. Every industry is different in terms of profit margins and market based wages…and a there can also be a huge difference in individual businesses within an industry based on things like their maturity, competition, geography or other factors.

    Despite all of that, how much you should make is still an important question and definitely worth thinking about. Luckily author and speaker Mike Michalowicz has clearly thought about this topic a lot. In fact in his most recent book, Profit First, he does a great job of digging into this very idea. He has created what he calls an Instant Assessment (you can find it on his website under resources) that helps you calculate a ballpark approximation of what your Profit, Owner’s Pay, Taxes and Operating Expenses should work out to based on your revenues.

    The engine behind his assessment process is the following table – Target Allocation Percentages, with Revenue Ranges across the top and the various categories down the side.  So as an example – a company doing $2M in real revenue (I’ll explain below) should target a profit of 10% (of that $2 M), Owners Pay of 10%, Taxes of 15% and Operating expenses of 65%.


    Take a couple of seconds to study the chart (click on it for a larger size). There are several interesting things that stand out about it:

    What is Real Revenue? – Michalowicz defines Real Revenue as your top line revenue less what you paid for subcontractors or materials.  So if you’re a $10 M dollar general contracting company and you pay out $8M to sub-contractors, your real revenue is $2 M…not $10 M.

    Profits are hard to come by – The profit line ranges from 5% for a start-up to 20% for a mature, established $10 M + business. This is a ballpark approximation for general small business, weighted towards service related businesses (since that’s the majority of what’s out there). You will hear stories of companies that make huge profits (30% – maybe even 50% or higher) but you have to realize a few things. For starters – you can’t believe everything you hear…and if someone IS making that kind of profit, then you can bet that others are going to be getting into that business soon and competing – which will drive that profit margin down quickly.  Finally – there are some industries (i.e. manufacturing) that would love to make 10% profit someday. If you’re in a highly competitive, non-differentiated industry, you just aren’t going to have great profit margins.

    Black Hole at $1M to $5M – Most businesses experience a very challenging growth period between $1M and $5M, mostly because that’s when you have to really start investing in overhead (larger management team, equipment, automation, etc.) if you want to grow. That investment costs money and makes you less profitable.

    Owners don’t make anything at $10 M? – If you look closely, the Owner’s Pay drops to 0% at $10M. That doesn’t imply that an owner doesn’t get to make any money at that point, it’s more of a recognition that the profits at that level end up being a lot of money and the owner can (and maybe should?) consider hiring a CEO and promoting themselves to the Chairman of the Board role instead where you don’t take a salary and instead just take profit distributions.

    Finally – it’s important to note that the Target Allocation Percentage table is a high level estimating tool – more of a rule of thumb type of guide. There are big spikes because it’s a simple table. If you’re around the $1 M mark in revenue, then there’s a huge jump in expenses as you cross to the next range. Obviously that’s not how it works in the real world, but the table can still give you a reasonable ballpark to work with.

    How much money should you be making in your business?

    Based on the Profit First assessment, how are you doing? If you’re like a lot of business owners, the information in the assessment process will be a wake-up call. It’s common for business owners to be short of those numbers. That doesn’t mean your business (or you) are broken beyond repair, it just means that there’s room for improvement and with focus and consistent effort you can start steering towards a much healthier outlook over time (if you want help with that – just let us know…).

    Do these numbers make sense to you? What stands out the most? What do you disagree with? I’d love to hear your thoughts in the comments below.

    Shawn Kinkade  Kansas City Business Coach

    18 Aug

    american football player man running  silhouette

    With summer winding down, it’s time for the NFL to kick off. So…do you have a salary cap for your business?

    You don’t?  Maybe you should…Greg Crabtree is the author of Simple Numbers, Straight Talk, Big Profits and one of the great ideas in his book is the recommendation that every business should self-impose a salary cap just like the one that NFL teams deal with.

    Don’t think about it in terms of cutting or controlling costs – it’s really a focus on labor productivity. How much output, revenue, benefit do you get from each dollar you spend on labor?  As a business owner, your single biggest expense is likely payroll – the salary that you pay to your employees (and yourself) or the money paid out to sub-contractors or vendors for labor. If you want to impact your overall success – your profitability, then you need to start by looking at your labor productivity as the biggest component (since it’s the biggest expense).

    How to calculate your Salary Cap

    Based on the way the media talks about the NFL salary cap, you would need a team of PhD’s and a big chunk of super computer time to calculate any given team’s salary cap position. Fortunately it’s way easier to calculate your salary cap as a friendly neighborhood business owner.  Here’s the breakdown:

    Let’s assume (to keep the math easy) that your business generates $1M in revenue.  And that you have determined that you need a 10% profit from the business (after paying yourself a reasonable market wage of course).  ***Note this assumption of a predetermined profit and paying yourself a market wage is another really important concept for many business owners, but I’ll save that for another post.

    With those assumptions in mind, you can back into what your total expenses look like – leaving the question of which expenses are salary vs. non-salary.


    Your non-salary costs should be fairly easy to calculate – these are all of your fixed costs…stuff like rent, utilities, insurance, etc.  This would also include your cost of goods (materials, etc.) for $1M worth of products if you have that kind of business.

    Let’s assume that your non-salary costs are $400,000…


    As you can see, that means your salary cap is $500,000, which includes all labor costs – including what you pay yourself.

    If your current payroll expense is more than $500,000 (and the other numbers are correct) then you’re not going to hit your profit target and your business is at risk. Which gets us back to the labor productivity idea – the key is to generate $1M worth of revenue from that $500,000 of labor and if you want to be more profitable than 10%, then you either need to cut your salary expenses without impacting your productivity (do more with less) or grow your revenue without increasing your salary (again do more with less…or technically the same in this case).

    To bring it back to the NFL comparison – when the Chiefs cut a high priced veteran player and replace them with a rookie, they are hoping to increase their labor productivity by getting similar production and reducing their cost at that position. That allows them to invest that money somewhere else within the team.

    Implications for Business Owners and growth

    Odds are that you haven’t thought about a salary cap before this – but it’s a great way to model where you are with your business and identify if you’re getting what you need out of your team in order to really be successful.

    For  growth you can use this model to figure out what would be needed for a 15% profit at your current salary cap and hold off on hiring until you hit that point. As you grow without hiring, things will become challenging and at some point you’ll make that next hire, which bumps up your salary cap – and maybe drops you back to your 10% profit level for awhile. Bouncing back and forth between 10% and 15% gives you some guidance and guardrails on how to grow without putting your business at risk or in the red.

    If you’re not where you want to be in terms of profitability – what would your salary cap need to be in order to get you the outcome that you want? Who do you need to cut from the team? Or who’s not performing? It’s a tough analysis to do but it could mean the difference between struggling or winning.

    This is a simple idea (which is what I really like about it). What do you think? Could this model be helpful for your business right now? Are you getting good labor productivity from your team? Do you know? I’d love to hear your thoughts – share them in the comments below.

    Shawn Kinkade   Kansas City Business Coach


    08 Jul
    photo by Steven Depolo via Flickr

    photo by Steven Depolo via Flickr

    If your company doesn’t have a handle on getting paid in a timely way, chances are your business will eventually fold, regardless of how great your products or services are.   That was the next message; #4 of 5 on the handwritten outline, thoughtfully drafted by a senior peer of mine at a time when failure was not an option. It would have meant bankruptcy, not only for my business, but personal bankruptcy as well. That proved to be strong motivation to follow this wise counsel.

    The first three pieces of this business puzzle focused on #1 employees, #2 customers, and #3 knowing your margins.   But #4 “Collections”; was all about getting paid in a timely way and not setting yourself up for a cash crunch.  This was about Accounts Receivable.  You know….the work you have done but haven’t been paid for.   Or to put it another way, the money that is now yours, but your customer still has it in their bank account.  Yes, that money, that’s what Winning Advice #4 focused on.

    As the three that preceded it, the words were limited, but the importance was significant.  Word-for-word it read like this…

    4. Collections

    A. Rent advance

    B. Machines as delivered

    C. Call-Call-When can we expect payment

    D. Adjust Credits limits often

    Simple…but critical.

    Do you want to improve “Your Collections”?    

    Rent Advance (payment).  Even if your company doesn’t rent equipment, every business is selling something.  The message in this: Focus on getting paid in advance or at the point-of-sale if at all possible.   If your product or service requires setup time or preparation before delivery, consider implementing at least a partial payment in advance.  Today it is easier than ever to use technology to shorten this payment cycle.  Are you using it?  This means having invoices prepared when the product or service is delivered; that can be a shift in procedures for a lot of companies.  Although this may not be possible for all your business transactions, think about where you can get paid in advance and start there.

    Machines as delivered.   Maybe you have widgets or provide a service.  This one is about documenting what you sell and getting paid for what you provided at the time they take possession of it.  If a customer orders an additional program, adds an option, wants to make changes other than what was originally agreed upon, keep those issues separate. Get paid for what your client has already received and don’t allow a small change to delay payment on a large invoice.

    Call-Call-When Can Expect Payment.   For those accounts that are extended terms or a credit line, you should have a plan or process to follow to get paid.   There is a lot of truth in the saying The Squeaky Wheel Gets the Grease.  So call…and call regularly.   Your accounts receivable department should have a process that includes getting actual dates to expect payment.  The other side of this is you must get invoices out as soon as the product is delivered or shipped; you can’t call and demand payment when the client doesn’t even have the invoice in their procession.   Remember if you haven’t been paid and your client has your widget, they have your money in their bank account.

    Adjust Credit Limits Often.  This only applies to accounts that have credit lines.  But for those that do have credit limits don’t neglect to monitor and adjust the limits.   There is no reason to give someone a $10,000 limit if they never spend more $1,000/mo.    Another suggestion to protect yourself on open accounts is to be clear on who can and can’t authorize purchases from your business.   Some companies will provide a list of approved names if you simply ask.   Clarify if purchase orders are needed; there is nothing more frustrating than to be told you aren’t getting paid for something that was purchased on a line of credit by someone who was not authorized to buy it and you have no PO or signature to back it up.

    The bottom line is poor management of accounts receivable is one of the biggest areas businesses get themselves in trouble.  Unfortunately, the faster your business is growing the more critical it is to manage your “collections”, because your expenses are typically growing with your business.  So how are your collections?  When was the last time you tried to shave 5 days off your outstanding accounts receivable average?

    As always, if you have any suggestions you would want to add to this list, please feel free to comment in the space below.

    Chris Steinlage  Kansas City Business Coach

    23 Jun


    I’ve talked before about the great advice I got from a mentor of mine. Profit Margins were the focus of Winning Advice #3 on a list of 5 that became part of my blueprint for success in the spring of 1997.  In short, it said a business owner must understand the importance of establishing, understanding, and maintaining minimum Profit Margins.   And yes, this means you first need to know your costs!  This followed behind #1 Hiring Quality People and #2 Acquiring Customers which were previously shared.

    In less than 25 words, the directive was simply scribed as this.

    3. Retain Whole  Goods Margin

    A. Increase parts margins on (Proprietary) Parts.

    B. Decrease parts margins on Fast Moving Parts to keep the will-fits out.

    ….and to clarify a couple terms:

    “Whole Goods” refers to a whole product: a car, a boat, a tractor, a house – in this case, a piece of heavy construction equipment.

    “Parts” would be the tires, a propeller, a fan belt, a door, a window, and so on.

    Putting the advice to work in your business…

    Retain Margins (on your Product or Service).   First of all to be able to retain a margin, you first need to know what the cost is.   Your fixed costs (what it costs to unlock the front door each day) and variable costs (those directly associated with the product or service) are the two categories of costs in running a business.   If you don’t know your costs, it’s worth the time to figure them out – this break even analysis may helpful.

    Once you know your costs you need to establish pricing that retains a margin high enough that it returns capital back into the business every time one it sold.  Does this mean you will always get the profit margin you want?  No.  But, it will clearly establish baselines so you know when you are no longer making profitable transactions.   Test:  If your actual net cost of an item is $100, to sell it at a 25% gross margin what it the selling price? ________ (answer below)  (Hint – the gross profit margin is different than the markup).

    Increase margins on Proprietary (Products or Services).   If your business sells something that is unique and they can only get it from you; you should get a higher margin for it.  You deserve to be compensated for the time it took to develop it, refine it, and perfect it.  So don’t give it away!   Should you be reasonable in your pricing? YES.  But treat it like a commodity?  No.   Take a look at your product offerings, if there are services or products that are uniquely yours and they provide real value (high Return on Investment) to your customers, don’t be afraid to put a higher profit margin on that product or service. This is an area that we see a lot of business owners struggle with.

    Decrease margins on (common items) to keep the (competition) out.   Think of this as the stuff your customers and clients can buy anywhere.  It is a commodity.  Even if you make it yourself, it is something that others make as well.   Price is king, the main driver for buying it from your company usually centers on convenience, loyalty, and brand preference as much as anything else.   You need to be competitive in your pricing on these items or services or you will not get the business.

    That said, one way to increase margins on these items is to group them with something proprietary to your business or create a process that adds value to the commodity.   An aggregate salesman (think crushed rock) once shared how they added significant margin to their bottom line by improving and streamlining the delivery options for their clients.   The rock itself is a commodity, but they added value and separated their company from the others by improving their delivery options and their customers were willing to pay a premium for the service.

    Profit margins, without them you do not have a viable business.   When is the last time you reviewed yours?   If you haven’t done so recently, it is probably time.  If you’re not sure where to start, feel free to contact us and we will do our best to point you in the right direction.   As always, we welcome any thoughts in the space below.

    Chris Steinlage Kansas City Business Coach

    Test Answer:  Sales Price (SP) is $133.00    Gross Profit margin is calculated as Gross Profit / Sales Price.  (And Gross Profit is Sales Price – Net Cost).  So in our example the equation is (SP – $100)/SP = .25  Which gives you an SP of $133.00.

    24 Feb


    Tax season is shifting into high gear.   This is also the time of year we are most likely to think about the potential of being audited by the IRS.  Even though the potential for an Audit is only about 1% for  business owners,  the simple math says out of 100 of your business peers at least one of you are going have more intimate relationship with the IRS this year.

    For many business owners tax season is viewed as a dreaded time of the year when they are forced to sit down with their CPA and begrudgingly discuss the numbers of their business.   It should be noted our experience shows that businesses that meet more regularly with their CPA’s (at a minimum quarterly) have a much better handle on the finances of their business.  That discipline would be referred to as Tax Planning.   Tax Planning is a good thing; it is legal and highly recommended.   If your business has any level of complexity, seeking consultation from a tax professional is always good advice.  However, it’s sometimes tempting counterpart, Tax Evasion is another; Tax evasion is deliberately misrepresenting the state of your affairs to the IRS.

    Improper tax accounting is usually not viewed as tax evasion unless the IRS determines there was fraudulent intent by the business owner.

    In 2011, British accountant Richard Murphy estimated global tax evasion to be 5% of the global economy.  The USA led the way with 337.3 billion.   But because the US is the largest global economy, the amount as percent of GDP, was only 8.6%; the lowest of the top 10 countries.   So I guess as American Business owners, you can pat yourself on the back for that statistic!   Regardless of size, at its core, any number above 0% says something about the overall moral fiber and principles being practiced.


    With those numbers in mind, here are 4 discrepancies the IRS has been known to target should this be the year you are part of the 1% of audited businesses.

    1)      Discrepancies in Accounting. 

    • The amounts on the financial statements should match what is on the corporations return.
    • Any irregularities raise questions.

    2)      Not reporting significant amounts of Income.  

    • Business owners not accurately reporting business receipts.
    • Shareholders not reporting dividends they pay themselves.

    3)      Deduction Claims

    • Grossly overstating travel expenses
    • Fictitious deductions
    • Stating personal expenses as business expenses
    • Overstating charitable contributions.
    • Lack of Verification

    4)      Improper distribution of income

    • An example of this would be a stockholder directing income to a lower income bracket family member(s) to reduce their tax liability. (paying the kids)

    The list above is not meant to be a complete list.  It would be logical to assume that during an audit, if something is uncovered that doesn’t add up, the auditors will naturally dig deeper in the area of the discrepancy.   And the goal of this post is not to sound like a tax expert, but to remind you as a business owner this is serious stuff and it should not be taken lightly.

    Have you ever been audited?  If anyone has some additional thoughts on this subject, please share them in the space below.   Without a doubt as business owners this is a common thread that binds us all so your input and suggestions would be greatly appreciated.

    Chris Steinlage Kansas City Business Coach

    Photo by JD Hancock via Flickr