How Much Does A Small Business Owner Really Make?

Posted by Heather Villa, CMA, MBA, MSM on September 25, 2009 in: Bookkeeping & Accounting, Business - Plain & Simple

If you are a small business owner, you probably have a financial target in mind. This target is the amount of money that you would like to make. However, meeting that goal can be harder than you think. The reason is that much of your money will be swallowed up by the business overhead. Many small business owners do not fully understand the financial side of business ownership. However, when you understand your financials, you’ll be better equipped to make sure that you earn enough money to keep your business running, and to put food on the table, and to invest for the future.

So provided here is a guide to determining how much money you actually have.

How Much Do You Bring In?

In order to start figuring out how much you make, you will first need to figure out how much your company actually brings in. If you have a good bookkeeping system, this should be fairly easy. However, many business owners when asked “what’s your company’s revenues?” will hem and haw and “ballpark it”. (And in my experience, the amount they give is much higher than reality).

If you can state exactly what your company is generating in revenue, that’s great. But if you can’t, or if you’re brave enough to admit that your bookkeeping is Mount Everest of scrap papers and receipts, you might need to invest in a bookkeeper or bookkeeping system to help. While business owners might balk at the expense (because a bookkeeper doesn’t seem to bring in revenue), they might be surprised to discover just how much money they can actually earn because they have a bookkeeper: Expenses are often reduced and the owner’s time is freed up from administrative tasks.
Once you have determined how much money your business brings in, you will need to determine how much the company spends each month.

How Much Do You Spend?

Before this question is answered, let me recommend (is there a stronger word than recommend?) that you separate business and personal expenses. Not only will this give you a more realistic view of the health of your business but the good folks at the IRS will appreciate it, too. Business expenses come out of business revenue. Personal expenses come out of the wage you earn from the business.
Once your bookkeeping records are well-organized, it should be fairly easy to determine your set monthly business expenses.

Your next step is to subtract your expenses from your income. In theory, the result is your monthly personal income. However, it is not quite that simple.

Smart business owners know that, aside from buying the products and services they need to keep their business running today (expenses) they also need to make additional purchases to build for the future (these fall into the expenses category but I like to think of them as investments), and, they need to reserve some money to help keep them operating in the future (operating capital). You need all three run a successful company. If you take one away, the business could cease to operate! However, at different times, some will be higher than others. In the first years, you might have higher expenses as you buy things you need to run your business and you might willingly accept lower personal pay in order to have some operating capital, too. Then, over time, you’ll want to increase the amount that you invest in your business for the long term.

Revisiting the question

So, how much money do you make? Many business owners estimate a number that is far too high. However, by getting a handle on your finances and then by making sure that you’re paying the right expenses, you’re investing in your business, and you have some operating capital, you’ll build a stronger, longer-lasting business. And the more you do this, the more you’ll make.

Over time, your income will steadily grow, but so will the value of your business. Some day, when you look to exit your business, you may be able to sell it as a high-value asset. Now you know how to get there.

About the author: Heather Villa, MBA CMA MSM, is a Business Coach and Entrepreneur. She helps business owners achieve success in operations, productivity, project management, and social media. Read her other articles at http://hireheathervilla.com/resources/articles/ and visit http://heathervilla.com for more information.

Disclaimer: © 2009 Heather Villa. Permission is granted to repost this article. Article must be published in its entirety, including author bio, and all links must remain intact.

Heather Recommends:

Running a business can be busy, challenging work. I can help you become more productive and successful. Find out how.

Product Spotlight

ad

Business Lunch Club