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.
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Let’s say you want to make $10k/month in your business. The good news is, it’s a great goal, and it’s doable.
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.
Tell Me…
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.
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Such good advice! I think it’s so easy to get caught up in earning numbers, and forget that a lot of that isn’t really ours to keep. I made the huge mistake of under estimating my tax obligations when I was a young independent contractor. Never again! I hope this post saves others from making the same mistake I did once.
That’s a lesson that’s easy but painful to learn — but once you learn it, you’re in the clear! Glad you now know to plan so it won’t happen again. Thanks for sharing that here!
Great advice. Your straight and love that.. I am just starting so you give me clarity on many different things.
Always my pleasure to help, Connie!
I too am just getting started and in the often shiny internet world, sometimes it’s hard to stay grounded or optimistic about your own progress with things like “I have consistent $10k months every month in my biz”. Thank you for bringing some clarity to this topic and breaking it down in real terms. It absolutely pin points what is truly important to the health of your biz and even yourself. Thank you for your honest approach! A good read for all entrepreneurs no matter how far down their path they may be!
Thanks, Libby!! The internet world is an amazing place to work and I’m so grateful to be here. At the same time, there’s lots to learn (but it’s all learnable!)… and the payoff is worth every effort and sacrifice it takes to “make it.” Best of luck to you!
You’re absolutely right Jenny! Money does love clarity!
You guessed it, I’m one of the financial people. I’ve been helping entrepreneurs/biz owners plan for and build profit and working capital since 1998.
The money talk can be very uncomfortable, especially at first. Ultimately….it’s an empowering conversation well worth having. Do yourself a favor. Accept Jenny’s Action Challenge.
If you would like help with budgeting, financial planning, choosing accounting software for your business or would like to have a money talk, send me an email at rinman@bottomlinellc.com.
Mention Jenny Shih and you’ll receive a free initial consultation and some complimentary resources to help you raise the bar.
Hee hee! I love you Jenny!
This was really eye-opening when we first started coaching together and I saw the reality of the numbers.
A few tips:
1) I used to get so pissed at having to give such a high % of my money to Uncle Sam but now I actually get very woo-woo with it and bless every penny that goes there and visualize that it’s helping people actually have jobs and all the wonderful things that we are priveleged to have as an entrepreneur like freedom and the luxury of making our own hours and exercising our creative gifts. A little gratitude goes a long way!
2) Tool that Jenny actually gave me for those of you who hate budgeting like is YNAB (You need a budget!). For those of us who are less left-brained, this resource is pretty awesome!
Thank you for the post Jenny and to all of you out there-we can do it! 🙂
I love this, thank you so much for this post! As I start my business this is so helpful to know.
Yes! Revenue and take-home pay are two different things – and a lot of business owners don’t consider this when creating their financial goals. This is awesome advice, Jenny.
I also do this when I’m helping clients create pricing packages for their services. We don’t just look at what price will aesthetically appeal (i.e ending it with a 9 or a 7), but also the work they’ll put in or tools they’ll use to provide the service – and what this costs them.
Going through this honest process really helps them see their pricing, and their value, differently.
This is a great reminder to get clear on gross versus net income. Another mistake I see in small business, especially new sole proprietors, is not keeping track of proper write offs. From trainings, to office supplies, travel to speaking gigs and the like, I have seen people leave a lot of clients overpay taxes by leaving write off money on the table.
Yes! We absolutelu need to track write-offs! Definitely cuts back on what we pay the IRS!
Hi Jenny,
When I first read this post, I thought — not for me. I’ve done the math. During a bike ride from hell yesterday, I realized I was stressed out because I didn’t really know. I’d only done the math in my head and jotted down a few numbers. I didn’t even know what it cost me to live every month. I kept hearing my old boss saying “show me the facts.” So I sat down and did the math.
I can now breath again. It’s still scary, but I’m way less anxious. At least I know what I need to generate into to create that income. It is also conservative. My plan is to refine it once a month.
From there I was able to set targets (basic, stretch and super stretch) for every month.
Instead of thinking that I have to everything right “RIGHT NOW,” before I go belly-up, I have the realistic picture – which is 8 months to slowly increase my income from what I can make now to what I need it to be sustainable (and hopefully more). That’s taking a load off my shoulders. Funnily enough I find that more motivating.
What surprised me about this is that I thought I would have to use of my two backup plans in January (retirement savings plan or sell my house). It’s a big relief that I won’t have to do the latter. If push comes to shove, I can always dip into my retirement savings plan (I’d already figured how much I was willing to sacrifice to build my business). It’s a relief I probably won’t have too.
It also allowed me to decide how much I could spend in my personal life and business.
Thanks for this post,
Nathalie
I’m so impressed that you’re seeing this in yourself, Nathalie!! It takes guts to admit that personally and publicly!
It’s “funny” too that you were better off than you realized. I had a client in that same position. So stressed that she wasn’t making enough and when she got down to the actual numbers, she was making way more than she realized.
Too many entrepreneurs live in fuzzy-numbers-ville and it’s a TERRIBLE idea! So glad you’re getting things in order stat! Way to go and thanks for sharing here!
This was great Jenny! I agree with you, and the statement resonates on a visceral level – Money loves clarity. Amen!
Jenny, this is a great post!
When I create my “magic number” every year, I sum all my expenses, taxes and what I need to “take home” to cover my needs. This number is what I need to make.
Then I add some extra money for emergencies and savings. That’s that “magic number” I need to make.
Thank you for this, Jenny – very sage advice!! I have been running my own business for 16 years now, and one of the key financial things I keep on my radar are my QUARTERLY ESTIMATED TAX due dates. I always make sure I have enough liquidity to pay that on time (once you have been in business for a couple of years, you will have a good idea of how much that will roughly amount to…). That has saved me so much stress and complications. Also, it helps to make a budget with your running monthly larger expenses (like office rent, utilities, DSL, etc) and keep that updated