Arbitrary Numbers Destroy Businesses

In all my years in business I have seen many 20 plus million dollar businesses with little or NO profits whatsoever. As a matter of fact, this is why I am usually called in… to reengineer the company and take it from red to black! (MaryEllen Tribby)

Profits Rule - Revenues Drool 

You see end the end of the day, the only number that really matters is the bottom line, your profit number. 

You can brag about revenues all you want but you do not put revenues in the bank. The only bankable number is profits. 

Furthermore any monkey can build a 5 million dollar business if you gave them 6 million dollars to build it. 

And when I hear statements like the one above. it is easy to understand why 80% of all new business fail within their first 18 months. That's right 80% of all new business fail. 

So today I want to arm you with the ammunition you need to succeed. If you are running or plan on launching an online business, acting on the advice below will give you the fighting chance to be one of the 20 percent! 

The More Your Know, The More You Grow 

 

To run and grow your business, you need to know about all your key metrics. If you want to become a great entrepreneur, executive, or business owner, you need to face the facts. If you don't face facts, you can't grow your business. 

 

Numbers are the key to understanding the success or failure of anything you do, especially your business. So key metrics are the numbers that help determine the health of your business not only for today, but for the week, month, quarter, and the year as well. 

 

Daily Key Metrics 

 

Every day, there are important numbers you should look at. That's why we say key metrics. We don't just say daily metrics; we say daily key metrics. Daily key metrics are simply the vital factors about the health of your business that you need to look at every day. The three daily key metrics and reports that correlate are: 

 

•  Cash (Cash Report)
•  Subscriber counts (On/Off Report)
•  Current marketing results (Marketing Report -by campaign)

You need to look at your cash report. This means you need to how much money comes in the door every day. Not projected money or future sales but how much actual cash comes into your bank account every day. 

This is essential because first, you need to know how much money you need to make every day just to break even. I call this the "keep your doors open" number. With this number, don't forget to give yourself a salary, but don't pick an arbitrary number. Arbitrary numbers are really dangerous. 

The biggest mistake that most business owners make is to define their salary as whatever is left over at the end of the month. Depending on how your business is doing, you're likely to make two big mistakes. 

First, you may not even pay yourself at all. Second, you may take too much money out of your business and not leave enough to keep your business running. If you pay yourself a fair and reasonable salary, then you'll be running your business the right way.   

To Keep the Doors Open = Fixed Plus Variable Expenses 

You have to know all your fixed expenses that happen on a regular basis. This means the cost or expense does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that must be paid by a company for their business. 

These are the same expenses you have to deal with every week or every month, such as paying rent for office space, the cost to host your website, or the cost of your phone conference bridge. If you have any salaried employees, they would fall under this category as well.   

Next, you have to know your approximate variable expenses that will fluctuate during the month, depending on the output of products and services. For example, one month you may hire a copywriter but the next month you may not need his or her services, or you may purchase a large quantity of media advertising one month but not the next. 

Costs in Action 

Let's use a simple example. First determine what your salary will be. You need to consider what's fair and reasonable and what you really need to live on. Be realistic. When you're just getting started, it's probably not practical to give yourself a salary of one million dollars a year. If you have a full-time day job and you're spending just a few hours a week on setting up and running your own online business, an annual salary of $50,000 is pretty good. 

For your annual fixed expenses, let's say it's $6,000, which can include your auto responder, utilities, rent, and other necessary expenses for running your business. That means you're paying $500 a month.

When you first get started, your auto responder bill will cost the same every month. When your list gets much bigger, you'll start paying on a per deployment basis. For now, you can mail about 10,000 people for $39 dollars a month. So your e-mail bill will be a fixed expense until you get a much larger list. Then your auto responder bill will become a variable expense. 
  
Let's assume that your annual variable expenses are $12,000. I'm assuming you're buying media and paying freelancers a couple hundred dollars a month to do various work. Add up your salary ($50,000) with your fixed expenses ($6,000) and your variable expenses ($12,000) and you've got total annual expenses of $68,000 a year. 

Divide $68,000 by 365, which represents the number of days in a year. So to keep your doors open, you need to make a $186.30 a day, which seems very reasonable. Now I didn't use a five-day workweek because your business will be earning money seven days a week. Remember, the biggest aspect of that equation is what you're paying yourself.

Now you can plug in different numbers and see what you can afford. If you decide to pay yourself $75,000 a year and your fixed and variable expenses remain the same, you'll know how much more you need to make every day.

In the beginning as an entrepreneur, you'll need to sacrifice such as putting in extra work because you know in the future; your profits will be even bigger. You might be making $50,000 at your current job and give yourself a salary of $40,000 from your online business. Now if you quit your full-time job, you'll be making less money but you'll have much more freedom working for myself. As an entrepreneur, you can do whatever makes you comfortable. 

If you need a $186 a day to break even and you start making $250 a day, you might be tempted to take that incremental revenue and pocket it. However, if you're looking to really build something special, take any profit money and bank it.