YES!! Local Small Business Owners Can Make $100,000 in Profit!
Listen to the Episode Above
Here are the Show Notes from the Episode:
Welcome to Episode #3 of the Local Small Business Coach Podcast. Today we are going to discuss…
Can Local Small Business Owners really make $100,000?
First let’s acknowledge that some of you have already hit this milestone. Fantastic and I’m so proud of you and your business.
Plus, some of you have hit this number but it might be due to being in higher end markets. And since you can charge more, your take home might be more. But since your cost of living is so high, you might find your number might actually be $150,000 vs the $100,000.
Either way, this episode will help you as well. It will be for anyone that wants to increase their profits.
The vast majority of you however, are probably landing somewhere between what the statistics show which happens to be $35,000 and $75,000.
I’m going to split this topic of Developing a $100,000 profit business into two episodes. In our next episode we will dive into the 8 Step game plan to making it happen, but first we need to identify what your target sales/revenue needs to be to obtain your $100,000 profit.
Now, before we hop into this episode, I want to warn you. This might get a little heavy into the numbers and over a podcast it might get a little overwhelming. But, don’t worry, I know you will not be able to memorize all of this. My main goal is to walk you through the process you need to follow to identify your needs to hit your target.
I will also be creating some tools to help you with the exercise we will be going over.
Attached to the show notes will be a few spreadsheets you can use and in the near future, I’ll do a video that will also walk you though. More on that later.
So if you bare with me, l promise you… this exercise is critical for you to do. Yes, I know it will be boring for most of you. Some of you will love it. Just know that I wouldn’t torture you if I didn’t believe this was important. I’ll try and make it as painless as I can. Tomorrow we will get to the fun stuff.
Time to dive in.
One of the biggest roadblocks preventing local small business owners from hitting that $100,000 profit goal is, they are working the financial problem wrong. That is, if they are working the problem at all.
Let’s face it, if we have already identified that most of you are technicians working in your business the vast majority of the time, then when are you spending the time to discover what you need to do in sales to hit your take home target?
What most of us do to earn more take home pay is to just keep taking on more jobs hoping to create the income needed. Perhaps this is how you have been running your business.
But, as you know, if you do $3,000 in sales, that doesn’t equate to you taking home $3,000.
Out of that $3,000 you will also have to pay your costs on the products or job plus you still have your expenses as well. Never mind you setting aside money for the future growth of your company. In order to grow, you should always have part of your business budget, the money needed to keep growing.
So knowing all of this, let me ask you 3 questions that should help identify where you are on being ready for your journey to $100,000 profit. Make sure to try and answer off the top of your head. It will make sense later.
1st Question – How much do you need to take home each month to pay your bills and cover your personal expenses?
When you take your rent, food, utilities, bills, money for fun, kids extracurricular activities, etc, when you roll up all your personal expenses up, what do you need to take home each month?
For our example today, I’m going to use Bob. Bob runs a plumbing business. His specialty is installing garbage disposals. He is known as the garbage disposal king. Bob wants to have a $100,000 profit plumbing business. Currently he needs to make $4,000 a month to support his family. So $4,000 x 12 months, means Bob needs to make an annual income of $48,000 to meet his current needs.
So, when you answered the question, did you know your number? Or did you just take a wild butt guess?
Don’t worry, I’m not passing judgement. I’ve been there. I bet most of you out there have a general idea but not an actual number since most of us do not do budgets on a regular basis. We typically spend what we have. We just know to prioritize our bills and needs.
The problem with doing that as a local small business owner, is your income is never steady or consistent. Let’s face it, you always need a rainy day fund and for those of you with season swings, you need to save up for those bad months. This is one of the major reasons it is important that you know this number.
But if you don’t know it at the moment, just pick one that you think is pretty close for the next few question. You can always do this exercise later with actual numbers.
Ok, now for
Question 2. – How much in total sales must you do to get hit that needed Annual income?
I bet for most of you, you had to take an educated guess based off what you have been doing. And some of you, you just keep scrambling for jobs until you get enough to pay the bills.
This number will be different for each of you depending on your business. This difference comes down to your business expenses and on your gross margins.
Let’s talk about your gross margins and their impact on your quest for the $100,000 profit.
As you know, your gross margin is basically your mark up on your products and services. Normally your gross margin will be given in a dollar amount and sometimes referred to as your gross profit. You also have your gross margin percentage which is your gross profit divided by your costs.
Remember, this all before you take off anything for your expense.
So the questions becomes, How many of you actually know what your average mark-up or gross margin percentage is?
I know this will vary depending on individual products or services, but your business will still have an average that it will typically run when you roll it all up for the month. Do you know yours or have you ever figured it out?
Another key point to remember is, your mark-up/gross margin is going to be a combination of your product costs and your labor costs.
Even if you do not have employees, you need to have a value for your time. You aren’t working for free. At minimum, you need to set this cost at what it would take to hire someone to do the job. Remember, the ultimate goal is for you not to always be the one doing the job and eventually, you want to have someone else doing the “doing” so you need to assign a cost.
Let’s do an example, let’s say you feel your time is worth $50 an hour. This is an important number to have in mind when you are doing menial jobs as you grow your business. But more on that in later episodes. But for this exercise, we actually need to focus on what you would pay someone else to do that particular job. So let’s assume you would pay someone $10 an hour. So that is the number you need to use in your calculations.
Let’s take a look at our example of Bob and his garbage disposal install business. Bob installs garbage disposals for $160. Because he does so many of these, he usually is done in an hour. So his labor cost using our $10 example, is going to be $10. If it took him an hour and a half it would be $15. You get the point.
Now let’s see what bob’s gross margin for the job would be. He pays $90 for the disposal, $10 for the electrical pigtail & putty and has the $10 for the labor. So his total costs come to $110.
Now let’s figure out his profit margin
His total revenue for the sale was $160. His costs were $110. The gross profit he made was $50.
Now to find his profit margin we now take the $50 and divide it by his costs. So we take the $50 gross profit and divide it by his $110 costs. So $50 divided by $110 is 45%. So on this type of job he has a 45% gross margin.
Ok, I know we are tossing out a lot of numbers but hopefully you are still with me. Don’t forget, I’ll have a spreadsheet in the show notes to help you out. Plus, I’ll probably turn this into a video real soon to give you a visual as well.
Please know, you need to know these numbers. You don’t necessarily need to memorize them, but you do at least need to have access to them. Top business owners know these numbers. I promise you, in those big box retailers, they also know these numbers. From the time I was a department supervisor, I was required to know my departments number. By the time I was a district manager, I had to understand why one store was higher or lower than the one right down the road. That is how important this knowledge it.
Your gross margin is the key to your bottom line profits. If you want to make a $100,000 profit, you will want to know yours. It is a critical piece of the calculation to figure out what sales you need to hit your target.
Now, let’s use Bob’s Garbage Disposal Business to see what he needs to sell each month to hit his current profit need and eventually his $100,000.
Since Bob only installs garbage disposals, we already know his normal profit margin. The 45%.
Since we know Bob needs to make $4,000 a month, we can figure out how many he needs to install. At $50 a pop, he would need to install 80 garbage disposals a month to hit the $4,000. That’s 3- 4 a day. Working 6 days a week.
He actually needs to install even more than that. Don’t forget that Bob will have overhead for his business and we need to figure out how much in sales he will need to additionally do to cover those as well.
But before we do, let’s ask our 3rd
Question 3 – Thinking of your current business, how much are your average monthly business expenses?
Do you know off the top of your head? Or do you only know when you actually do your books at the end of the month? Assuming you don’t wait until the end of the year at tax time. LOL I laugh, but you know who you are.
Don’t forget, every business has costs for gas if it is a mobile business, your vehicle expenses, any insurances, licenses, uniforms, cell phone, rental equipment, and a host of other things. You need to know what that comes up to. This might fluctuate month to month depending on your seasonal swings. You at least want to know your average expenses.
Let’s go back to our example. Let’s just say our garbage disposal king has monthly business expenses of say $1000 a month. But remember, he needs to use the same calculation as before to figure out how many sales he needs to do to cover this. Only his profits go towards paying these expenses right? So, since we know he makes $50 a disposal, then we know he needs to install an additional 20 garbage disposal a month to cover his expenses. So that means a total of 100 disposals a month.
Holy moly that’s a lot.
If only it was that easy to figure out. But it’s not. Most of you sell a variety of different products and offer a variety of different services each month. So you must rely on your gross margin percentage to discover your target revenue.
Now let’s do this same exercise but using our gross margin percentage instead. Now, hang with me, I know this is going to make some of your heads spin but it is important that you at least understand the concept. Once again, use the cheat sheets to help.
Since we know that Bob’s Profit Margin is 45%, then we know his costs run around 55%. Confused? Let’s break that down real quick. If the money taken in represents 100%. Then it will fall into two parts. The costs and the profit. Since we know the profit is 45%, the remaining 55% represents the costs.
That means for every $1 Bob makes, his costs would be 55 cents costs and the remaining 45 cents is profit.
So, when we go back to our $4,000 a month need, we can take these percentages to figure out the sales Bob needs to do to hit his target.
But before we do, we need to actually take the profit he needs to take home (the $4,000) and we need to also include the expenses he has (the $1000) and we know that Bob needs enough sales to cover his true need of $5,000.
Here is where I might lose most of you. Yea, like I haven’t already. I’m sorry, but like I said earlier, I wouldn’t do this if it was important to each of your businesses. I just hope I’m breaking it down enough to follow along. We are in the home stretch so hang in there.
Ok, so to figure out the sales that Bob needs to do each month, we will take this $5,000 (which was take home profit and his expenses) and we are going to add on the costs to hit our total sales needed.
Remember, sales are made up of two parts. Profit and Costs. Since we know half of our number, we do our old math problem to solve for the other half.
As you might recall, when you have one part of the equation, you just divide the sum by the part to get the other part. I can hear you non math nerds already rolling your eyes. LOL
But we will do this using our percentages. But first we have to convert them to decimals otherwise it will not work right. So the 45% profit becomes .45 and the 55% costs becomes .55.
So now we will take our $5,000 need and divide it by the .55 and we get $9,090. Which means Bob will need to do $9,090 a month to get enough to cover his costs, his expenses and to have enough to take home the $4,000 he needs.
Remember, you don’t need to memorize this. You can have tools that help you. This is one reason I’m putting the spread sheet together to help you with this exercise.
But remember, our goal is to get to $100,000 in profit. Which comes to $8,333 a month.
So knowing all we do now, we can make an educated guess as to what we need to do. The one unknown is your expenses. Obviously those will tweak as you do more sales. Some expenses stay content and some will vary. So you will need to take an educated guess on this one. So let’s assume for Bob’s business, the they will go up 75%. So his expenses will go from $1,000 to $1,750. Remember, you can always adjust along your journey. But this should work for us at the moment. If you want, you can just double yours for now and adjust later.
So, for Bob’s business and his $100,000 goal, we would take his $8,333 profit and add his $1,750 expenses as we get around 10,000 if we round down to make our numbers easier.
We now take the $10,000 and as you recall, we will now divide that by our .55 for costs and we get $18,182 a month in revenue needed. This translates into $218,000 in annual sales.
For fun and giggles, for Bob, that means 363 garbage disposals installed. Hmm, Bob is going to need some help. LOL.
What I want each of you to do, is work out your numbers to figure out what you need to do in Sales/Revenue to hit your $100,000 in profit.
In our next episode, we will now take that sales goal and using an 8 Step process, you will develop a plan to hit that target. Don’t worry, that episode will not contain any math. LOL Just action steps you can put in motion.
Thanks for hanging in there with me. Hopefully you got some food for thought and you realize how important it is for you to have an understanding of how your profit margin is critical to your business’s success.
Don’t worry, the worksheet I’ve been mentioning will do all the heavy lifting as I have it set to calculate it out for you with a little bit of input from you. Plus I’ll have it set so you can do it by month if your businesses is more season and you have swings in your business.
We started off this episode asking Can a local small business owner make $100,000 in net take home profit? Absolutely! It just takes a plan.
As Steven Covey said in the 7 habits of successful people, you must start with the end in mind. You must know what you need to do in overall sales to even have a chance at hitting your goal.
There is a big difference between thinking you only need to do $150,000 and the reality is you need to do $200,000.
Remember, in our next episode we will dive into the game plan so please take a few moments tonight to figure out your number so you can begin to think about your game plan.
So here is your homework, head on over to the show notes at LocalSmallBusinessCoach.com/episode3 to get the excel spreadsheet that you can use to discover what you need to sell annually to hit your $100,000. This way you can start to form an idea of what you are looking for each month.
Thanks for staying awake and until next time, remember, if you like what we are talking about, then make sure to subscribe to the podcast so you don’t miss an episode.
If you love the podcast and what we are talking about, then please leave a 5 star review so other local small business owners know this is a podcast that they can’t miss.
Also don’t forget to visit the website at LocalSmallBusinessCoach.com to leave your question for me to possibly answer on the podcast in the future. You can leave it via the speakpipe button or just shoot me an email. Coming soon I will begin answering your questions on the podcast.
See you on our next episode…Bye for now…..
FREE TOOL MENTIONED IN THE PODCAST —>>> FIGURE OUT YOUR SALES NEEDED
New to Cost Margin & Profit Margin? Watch the Video
Have a Question You Want Asked on Air? Shoot Me Your Question
Podcast Website: LocalSmallBusinessCoach.com
Leave your Message on the website with the SpeakPipe Button or just email me at Tammy@LocalSmallBusinessCoach.com
Episode Show Notes: Episode 3 – Local Small Business Coach Podcast
Our Training Materials for Local Small Business Owners: TrainingforLocalSmallBusinessOwners.com
Starting a Local Small Business Website: StartALocalSmallBusiness.com
My Recommended Bookkeeping Program for Local Small Business Owners: Freshbooks Link
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