You know those times when you’re just humming along and enjoying life as an entrepreneur and then you read something that immediately delivers a cold, wet bitch slap to the face?
This is one of those bitch slaps. (You’ve been warned).
As entrepreneurs, we tend to get really caught up in a lot of shit that doesn’t matter at all. Like, not at all. We’re obsessed with tax write-offs and always trying to cut every little tiny expense (that $12 subscription for Hello Bar is not gonna make or break you, my friend).
We’re obsessed with the vanity metrics of our entrepreneur rivals friends. We constantly measure how many Facebook fans they have and how many fancy photo shoots they’ve done and how many major press outlets they have been mentioned in recently.
Who gives a shit? No, seriously. Please do not give one single shit about crap like that.
And here’s why:
While you are busy measuring the success of your “friends,” they are busy measuring shit that actually matters, like, oh I don’t know: profit margins, cost per lead, lifetime value of their customers, the effectiveness of their latest marketing initiative.
I know, I know. BOOOOOOOOOOORRRRRRRING!
But as life would have it, that totally boring stuff that none of us cares to do is exactly what leads to fancy schmancy spreads in glossy magazines (and that private school that you are dreaming of sending junior to, and paying off your house, and other amazing financial feats).
I hate to get all Peter Drucker on you, but I’m gonna have to get all Peter Drucker on you:
“What gets measured gets managed.” – Peter Drucker
So as promised, here are the characteristics of a healthy business, as taught to me by my friend, serial entrepreneur and angel investor, Dan Martell.
Answer ‘yes,’ ‘no’ or ‘I have no bloody idea,’ to the following questions:
- Are your annual pre-tax profits at least 10% of your overall revenue? This means that after you have paid all of the business expenses, other than taxes, (including payroll and your own salary) you would still have 10% of your total revenue left over in profit. Keep in mind, 10% is the minimum, anything less is bad. 15% is good and 20% is phenom.
- Do you have two months worth of operating expenses in the bank? A healthy business requires a healthy cushion for when things eventually go tits up (as they tend to do from time to time).
- Do you treat your business like a business? Or are you treating it like your personal trust fund? Do you have a separate business account to manage business funds and a proper business entity set up? Or are you dipping into the business funds on a regular basis to pay for your pilates classes and your kid’s braces (aka commingling)?
- Is payroll (including your salary as the owner) 40-80% of your gross revenue? Believe it or not, a healthy company’s payroll can eat up as much as 80% of gross revenue and still be a healthy business. Payroll for service businesses tends to be towards the higher end of that range because you need people to deliver the service. If you are in a product business, however, then payroll should be on the lower end of that range.
- Are you spending at least 10.4% of revenue on marketing? You have to spend money to make money and healthy businesses should be investing about 10% of revenue on marketing.
- Are you hitting your forecasted revenue goals within a 10% range? If you planned to generate $250k in revenue last year but only generated $150k then you are not effectively managing the business. You should be able to get within a 10% range of your forecasted goals, meaning anywhere between $225k to $275k would be considered hitting your target. The success of your business is not up to chance. Instead, you must create your own luck by focusing your efforts on the things that will make your revenue goals happen.
If you answered ‘yes’ to all six questions then a huge congratulations to you! You are running a healthy business. Pat yourself on the back and keep doing the damn thing.
If you answered ‘no’ to some or all of the questions, then your business isn’t in good health. But don’t worry, there’s a remedy for that. Simply start. Start tracking the growth of your profits. Start reviewing your company’s financial figures on a weekly basis. Stop commingling personal and business funds. Start saving for that 2-month cushion. Remember, what gets measured, gets managed.
If you answered ‘I have no bloody idea’ to most of these questions, then find out, my friend! Start crunching those numbers and find out whether your business is in great health or not. Knowing the truth about the status of your business is the only way that you can do something about. If the thought of crunching numbers makes you want to die a slow, miserable death then just hire a bookkeeper (they are not as expensive as you think) and get some help with this. This is not a step you can skip. Do not pass Go, do not collect $200 until you know what the hell is going on with your business.
Okay, so that was a cold, bitch slap, which was probably not that enjoyable. But guess what?
Now you are empowered with the knowledge you need to make your business healthy.
And if you are having that not-so-fresh feeling, know that I am right there with you. I have not accomplished everything on this list for my business. Yet. But you best believe, I will. And I will do that by continuing to effectively manage my business, paying attention to the numbers and staying focused on the things that will lead to growth and health for my business (usually the scary stuff that you want to avoid doing like the plague — do it!).
So what’s the verdict? Is your business healthy? If not, what are you gonna do about it?
