When a new year approaches, most business owners do something smart: They set an income or revenue goal.
Then they make a terrible mistake (one that usually ends up costing them money).
I don’t want you to fall into this money-sucking trap, so if you’re planning your income goals for next year, listen up. It’s time to get really honest about money, so that you can approach your finances from a place of confidence and control.
Today I’m sharing the financial blunder I see too many business owners make, and I’ll tell you, step-by-step, exactly how to avoid it.
Your business, your bank account, and your future self will be better off, guaranteed.
An Honest Conversation About Money
When setting an income goal, you must do more than just declare your goal and go after it. You also have to know what your goal really amounts to and where all your money goes after you make it.
This is where most business owners go wrong. They don’t dive into what that “magic number” actually looks like when it lands in their bank account.
And when they make this dollar-draining mistake, they find themselves in dangerous predicaments such as…
- Growing credit card debt
- Wondering if they’ll be able to pay next month’s rent
- Financial stress within their relationships (finances are hard enough on couples; add a business and the stress doubles!)
- Being caught without money to pay their taxes
Nobody wants to end up in any of these circumstances.
How can you avoid making a costly financial slip-up? Start by following the steps below.My Personal Recommendation for YouHow to Overcome Your Money Hang-ups and Finally Start Charging What You’re Worth
You Must Do This!
Let’s do a little simple math to see what that means and then how you can get there.
Let’s assume you make $10,000/month in revenue.
And you have about $2,000/month in expenses. (Yes, you must know your expenses!)
This means your pre-tax profit is $8,000/month.
In the US, it’s fair to assume you’ll pay roughly 40% of your pre-tax profit in taxes. (I know, it’s a lot!) In this example, your tax estimate would $3,200.
That’s 0.4 x $8000 = $3,200.
(If you’re not American, you’ll want to talk to a tax professional in your country to know what a fair tax estimate would be, though this is usually a good place to start for most countries.)
After you estimate your taxes, you can see what’s left to pay yourself.
Calculate it this way: revenue – expenses – taxes = take home pay.
In the above example: $10,000 – $2,000 – $3,200 = $4,800
$10,000 in revenue equates to a take-home pay of $4,800.
This doesn’t include any business savings you may want to to set aside or retirement contributions you may wish to make.
You can do this same calculation for any amount of money you want to make, whether it’s $3k, $7k, or $12k a month.
You can also work this equation backwards from what you want to pay yourself to what you need to bring in revenue-wise (though it takes a little Algebra!).Click to TweetSetting a new income goal? Jenny Shih helps you avoid a costly mistake.
Sometimes Honesty Stings
I’ll be honest, many business owners hate me (at first) for suggesting this exercise. They feel pretty deflated after they clearly see this money picture.
Sure, having this dawning realization isn’t as fun as thinking you can keep all $10,000, but at least it’s honest! More importantly, you won’t get caught spending everything you earn, leaving nothing for Uncle Sam come tax time, or finding yourself unable to pay yourself.
Plus, $4,800/month take-home pay is nothing to balk at!
Once you’re re-calibrated around money, you can set to work on creating your plan to get there. Creating and implementing your building action plan is exactly what I focus on with all of my clients, including in Make It Work Online and Make 10k [every dang month].
Together, we map out the specifics of what it will take to hit your income goals, so that you can take action and make those goals happen. Even better, you can move forward with confidence because you know exactly what you’re working toward — no costly surprises!
That’s why declaring your income goal is one thing; knowing what the numbers mean (and making sure you aren’t caught unable to pay a tax bill) is what separates prosperous entrepreneurs from the rest.
Start Now! Do the Math for Your Income Goal
Now that you know how to plan a realistic income goal, are you ready to raise the bar with your money?
Look at your past expenses and project your future ones. Estimate your taxes. See what you’re left with to take home.
This is a loaded topic, and I’d love to hear your thoughts.
Have you already gotten honest about money?
Do you know your expenses, taxes, and take-home pay off the top of your head? (You should!)
Are you ready to raise the bar around your money?
Declare it in the comments below!
P.S. This blog post covers a simplified calculation for tax estimation and works best for Sole Proprietorships and LLCs. Corporate tax calculations are a little different, though this rough calculation is a reasonable estimate.
P.P.S. Lindsay, my lawyer, wants me to tell you that this blog post should not be taken as professional financial advice. You should consult your personal financial professional regarding your unique situation. Examples on this website (including, but not limited to, my personal examples and this blog post) shall not be interpreted as a promise or guarantee of earnings. Earning potential is entirely dependent on each individual’s situation.My Personal Recommendation for You7 Most Common Obstacles to Making Six Figures (and How to Overcome Them for Good)