Welcome to Small Biz Mama, Episode 8: How Much do you Really Need to Make Each Month?
In this episode, you’ll learn how to determine how much money you need to make each month for yourself, your family, and your business. This number is going to be different for everybody. It's going to depend on lots of different things in your business, and we're going to go through each one of them and talk about how you get the numbers that you need.
This is a question that I get a lot. When I sit down with people, I ask, how much money they need to make each month, and they give me a number that is usually wrong. It's either way, way too high or it's way, way too low.
I want to help you get the right number for you, your life, and your business.
If you’re doing this, stop…
You might not be a numbers person. I understand, but it drives me crazy the number of women that say, “I'm not a math person. I'm not good at math.” We need to stop that right now because most of the math that you are going to do in your life and in your business is addition, subtraction, multiplication, division. You would do it on a four-function calculator.
We really need to stop this because you know what's happening? Every time we say as women, “We're not good at math. I don't get math.” Your daughters hear that. Your nieces hear that. We're perpetuating this stereotype that women aren't good at math. I've had family members who were amazing at math and then somehow between middle school and high school it was like beaten out of them. They were good at math and all of a sudden they were not good at math anymore. So, ladies, we need to stop. We need to stop this right now, okay?
What to do instead
If you have a mental block when it comes to math, have somebody help you with this, have somebody show you how to do this. There is power in numbers. There is extreme power in numbers in your business. And if you're not looking at your numbers, we have a problem.
It may be that you're sitting down with somebody who's helping walk you through the numbers. But you need to learn this stuff. You can't just put your head in the sand and say, I'm not going to look at my numbers because I'm not good at math. Analyzing numbers is not math. It's language. Most of you think you're really, really good at language. And most of you ARE really, really good at language. So, let's look at numbers as a language. That's what I teach my students in Bookkeeper Training School and my students that I teach in the university and online through my websites.
Accounting is the language of business. You need to have some basic understanding of your numbers in order to run your business properly.
First things first
The first thing that you need to do is figure out how much money you need to live. How much does it cost to run your household every single month? Some people know this number, most people do not. Most people have no idea what it takes to run their household.
Going through the pandemic, I've had a lot of clients tell me, “I never realized how much I spent on eating out” or “I never realized how much I spent at Target.” Now that they're not going out into shopping as therapy or eating out a lot because it's the easier thing to do, I'm seeing that people are saving a tremendous amount of money.
So, how do we figure out how much you spend each month?
Go through your statements
You have to go through your statements. The really easy way to do it is to pull all your credit cards, pull all your bank statements, and just look at your withdrawals for the month. How much do you withdraw from your checking account on a regular basis? How much do you charge on your credit cards on a regular basis? The one thing that you'll need to do if you pay your credit card from your checking account, is to remove any credit card payments that you made because that's going to mess up your numbers. You're going to double count.
Helpful apps and other ways to figure it out
If you really want to detail it out, which is what I typically do, there are a couple of apps that you can use for this. I like Mint, which owned by Intuit, which owns QuickBooks online, and they have a free app that you can use to pull in all of your information, and it'll categorize it for you and tell you how much you're spending. That's a good app.
You could do this on a piece of paper where you could make categories on different pages, and write down what you're spending. Then you can have your kids add it up for you. (I know that they're getting calculators in, second or third grade from when I was on the Board of Ed at Windsor, that they were giving kids calculators in second grade.) So you could have the kids add it up.
You could do it in a spreadsheet. I'm a spreadsheet person. I like spreadsheets because if I use a spreadsheet, I don't have to do as much math. The spreadsheet does it for me.
Dave Ramsey has an app that you can use. The issue with his app though is that, since he's anti credit cards, if you are spending on credit cards, you can't put your credit cards in there.
There's You Need a Budget, which is another app. We use USAA for banking. You can set up your spending there, and they’ll calculate your spending. Check with your bank, because a lot of banks are now actually building in this feature. That's the easiest way to do it.
Why this is important
You have to get a handle on how much you're actually spending every month. If you don't have a handle on that, it's really hard to determine how much money your business needs to make, and how much you have to work. Many times we just throw a number at the wall and say this is how much I want to make. We don't really know why that number is significant. We don't know why we pick that number. We just know that that number sounds good to us, and that's not going to get you where you want to be.
Once you figure out how much you need to live, you're going to figure out mortgage, utilities, eating out, groceries, and it’s going to be a little shocking, probably, but it’s something you need to do. Maybe it'll be eye-opening for you. We'll see.
Add savings 15 to 20%
If that number is $5,000 per month, I want you to add another 15 to 20% to that number for various savings. That could be paying down some debt, that could be putting money into retirement, that could be putting money into a savings account so you have an emergency fund, that could be setting up sinking accounts so you've got money for vacations and stuff like that. It gives you some cushions too. I want you to add 15 to 20%. If you're saying $5,000 per month is what you need to live, then if we add 20% to that, that'd be another thousand dollars. Now we're at $6,000. Let's take that $6,000 and let's put that number aside.
Calculate your business profit percentage, including taxes
Now we're going to look at your business. In order to do this calculation, you need to know your business profit percentage, and you want that to include taxes.
Your business profit percentage is the amount of every dollar that you bring in that ends up as profit.
Now you might be sitting there going, Kristin, I have no idea what that number is. If you use QuickBooks, or use Xero, or use Wave, we can actually run reports. We can get that number for you. If you have an accountant, you can ask your accountant to help you with this number. You can look at your tax returns from the prior years to get a rough idea for that number. There are lots of different ways that you can get that number. You can run a report and get it. You'd have to figure in your taxes as well, but essentially, the point of this is we need to know how much of every dollar is going to end up as profit.
Why you need to show a profit
I've had a lot of arguments with business owners, but this argument has kind of stopped since PPP and since unemployment. For years I've been trying to tell clients, please show a profit. If you do not show a profit in your business, that means there's no money for you to take home. I find that the most frustrated business owners are the ones that feel like they're not being compensated for the work that they're doing. So, we need to stop with this idea that we have to make all our profit go away so we don't pay any taxes.
Now I get it. Taxes suck. I don't like taxes either. However, if I don't have a profit and I don't pay taxes, I don't get to do cool things like go on vacation with my family. I don't get to pay our bills. I don't get to buy Erik a power wheel, which Jeff is currently looking at. I think he wants to buy one for Erik. There are lots of cool things I don't get to do.
All those people who have been trying to minimize their profit so that they can save money in taxes were not able to get PPP money or were able to get very little PPP money. They struggled to get unemployment because as far as unemployment was concerned, they didn't make any money in their business, and so why should they get unemployment if they have no profit? There's no money to pay themselves. A lot of business owners have really been struggling through this because they didn't want to pay taxes.
We also see business owners having trouble getting mortgages. Why? Because they don't show any profit. People say you can't get a mortgage if you're a small business owner. That's not the case. But if you don't show any profit, if you're not making any money, you can't get a mortgage. It's harder to get car loans. It's harder to get credit cards because you're not showing any income.
I would really encourage you to look at your spending, and spend smart for your business. Don't make business decisions based on whether or not you're going to pay taxes. Make business decisions based on the best options for you and your business.
These are things that over the last couple of months I have talked to so many business owners who said, “I don't qualify for funding. I don't qualify for help, no one will help me.” and I say, “Alright, well, what do your numbers look like?” and we dig through their numbers and they have no profit. They've taken losses every year they'd had their business or they've run $1,000 or $2,000 in profit a year. They have no profit. As far as all of these agencies are concerned, they make no money. They're not going to loan you money if you don't make any money. It's just one of those things. It's a very easy decision for a bank. They're not going to loan money to businesses that don't make any money because they'll never get paid back.
The whole thing with PPP is that this money is supposed to be to pay you and to pay your employees. If you don't have any profit, and you're a sole proprietorship, there's no money to pay you.
Once you have your business profit percentage, you want to make sure that your taxes are included in that number. Let's say that your business profit percentage is 30%. That means that for every dollar that you bring in, you are going to bring home 30 cents after taxes. And remember that's after all your business expenses and that's after your taxes.
Now we have to divide your total income divided by your business profit percentage.
Divide your total income need by your business profit percentage
We said that we need $6,000 per month, divided by 0.30 or 30%. So what does that mean? That means if you wanted to bring home $6,000 per month, free and clear in your bank account if you're running a 30% profit percentage, that means that you would need to bring in $20,000 in sales every single month. That's what that looks like.
Now you're thinking, Oh my God, that's a lot of money. Holy cow. That's a tremendous amount of money. How do we make that number smaller? There are two ways we can make that number smaller. We can either decrease the amount of money that you need to live off of, or we can increase your business profit percentage, which means that you're spending less in your business.
Depending on your business, you may need to go through and look at what you're spending money on. 30%, if you're an online business, is kind of low. If you're a brick and mortar business, 30% might be pretty high. It really depends on the expenses that you have.
That's why it's a really good time, while you're going through this exercise, to look and see if you are paying for anything you're not using. Are there better solutions out there that are less expensive? I don't want you to cut your expenses down to nothing. Because that's just going to make your stress worse. In some businesses, $20,000 is easy. $20,000 is a couple of contracts. It just depends on what you do.
Two ways to decrease that number, either decrease how much you need to live or increase your business profit percentage and we increase the business profit percentage by spending less of every dollar that comes in.
I want you to have the best business and the best life that you can have. In order to do that, we’ve got to do business seriously, right? And business seriously doesn't mean working 60 hours a week, but business seriously means knowing your numbers, stepping into that CEO role, and making sure that you are making the best decisions for your business and your family.
That's what I want to help you do. So, hopefully, you learned a little bit more about your business this month. You're ready to step in and look at your numbers.