Financially beneficial businesses

Prefer to listen rather than to read? The audio version of this article is on the podcast.


This is part 3 of a series about the compass points that I use as the true north for any business. In the first 2 parts of this series we covered how to make progress, and the things that can get us caught in the weeds. In last week’s episode we discussed strategic simplicity and some of the more common things in this cultural moment that can keep us mired in needless complexity.


Which brings us to the topic of today’s article, the one most service-based business owners, myself included, would rather put their heads in the sand over than talk about: Businesses should be financially beneficial to those who run them and work within them.


Before I go on, take a moment to feel how that landed in your body. You may be one of the people who already has this licked and is clear that your business exists, for many reasons yes, but one of them is to provide for yourself and any employees you might have.


But if you are like most service-based business owners, you might feel a contraction in your body. Maybe even a judge-y revulsion. Or maybe anxiety because you’re not sure your business is earning enough to take care of you. Or, it can just feel kind of bad to think about making money from your business when you got into business in order to help people.


As someone who has run service-based businesses for over 2 decades, and who has worked consulting for others in similar businesses for about 15 years, I can tell you that our feelings about earning a good, solid, nourishing income from our work can be… complicated. So let’s unpack that here!


The truth is, I have oh so very much to say about money and earning. So much in fact, that I have a whole series of episodes and articles and interviews planned on the topic. I trained as a financial counselor with the Financial Recovery Institute, so this topic is near and dear. You can think of this episode then as an amuse bouche (that’s for the food nerds out there) where we can look at some of the broad brush common issues in tiny, but mighty, service providing businesses like ours.


Here are the top 3 common issues around money that I will cover:


  1. We tend to over-give and under-receive which creates chronic insufficiency, often experienced as under-earning.

  2. We usually do not know how much we need to earn and therefore we don’t know what we need to charge (meaning we don’t have informed pricing or financial planning for our businesses).

  3. We do not set up systems so that finances are tracked and taken care of. Then we wind up short when it comes time to pay taxes, take a vacation, or take some sick or personal time off. Or we simply don’t know where all the money goes and why we don’t feel like we’re earning enough even when our revenue numbers look pretty good.

If you can relate to some or all of these, you are not alone! I see this over and over again when I work with very small business owners. And of course, I have done all of these things myself. I came to financial recovery work the hard way.


Let’s zoom in on point #1: chronic insufficiency


When we over-give and under-receive, or when we follow any of these patterns that I just listed, we wind up tired, resentful, and therefore unable to sustain ourselves or the business. Businesses have to provide for us financially or they will not last.


As I mentioned in my last episode when talking about the passion principle and workism, the word “hobby” is used in such a demeaning way. But really, hobbies are great! They are unpaid or low-paying passion projects. This takes a ton of pressure off of needing to contort the passion you feel for them into something people will pay you for.


Maybe something that is a hobby isn’t the way to pay your bills? Maybe instead you need to think about how your business can earn enough in a way that doesn’t require every second of your time so that you can also have free time (that nearly extinct phenomena, free time!) to pursue non-earning interests.


(If you’re thinking that’s easier said than done, you are correct. And I will tackle this whole “free time” thing in depth in next week’s episode on creating humane work lives.)


But this week, we’re talking about how we’ve got to make money at the thing we do to pay our bills!


Is this starting to feel a little yuck? Like I’m about to advocate for grabby hands take-everything-you-can-get mentality? How you can get to six figure months in no time at all!


I’m not. I get why we scoff at prioritizing having a profitable business. We’re surrounded by corporations that put profit first, way first, beyond anything else. They don’t care about their employees, they don’t care about if their product or service is detrimental to humanity and/or the planet- they just want to keep those shareholders happy. And that means raking in ever more profit. The arrow on the proverbial graph needs to keep hockey-sticking ever upwards.


We’ve watched this worldview be so utterly destructive for so long. The old Manifest Destiny doctrine coming to rest in corporations: Expand, and take everything you can. Strip mine everything and everyone for profit.


Yuck.


This is what Phillip Slater expertly describes in his, now out of print, book Wealth Addiction. That this addiction to more, more, more actually impoverishes us; It costs us a great deal as people and as culture. (He is speaking specifically about the US, so for my fellow Americans out there, you can still find used copies of this book here and there).


You, however, are a tiny but mighty service based business. This business model already wildly disrupts the status quo. You are not pleasing shareholders, you are not getting funded by venture capitalists while your product or offering takes a loss, you are not going for meteoric growth so that you can go public with your IPO and cash out. Nope.


You provide something useful to people, and in exchange, you are compensated, because you matter too. Making sure you have a sustainable income, that you have nourishing sufficiency in your life, is totally unrelated to wealth addiction.


We often resist making sure we earn a good living in our businesses because we fear, whether unconsciously or consciously, that we will become a Capitalism Monster. But we really don’t have to! This model of providing a product or service and being compensated in exchange is as old as the hills. Corporations and shareholders and the stock market and blah blah blah; This is a different and more recent (and more troubling) creature.


Now that we’ve hopefully put some of those concerns to rest, let’s explore what I’m calling chronic insufficiency. There is actually a whole body of work that examines this under the terms “chronic and compulsive under-earning”. There’s even an Underearner’s Anonymous.


This is how Under-earner’s Anonymous defines it:


“Under-earning is many things, not all of which are about money. While the most visible consequence is the inability to provide for one’s needs, including future needs, underearning is also about the inability to fully acknowledge and express our capabilities and competencies. It is about underachieving, or under-being, no matter how much money we make.

There’s also a book by Jerrold Mundis, Earn What you Deserve, which I both love and also find a little dated in its shame-tinged language… but, he has a great exploration of what under-earning is so I will quote him as well:


“To under-earn is repeatedly to gain less income than you need, or than would be beneficial—usually for no apparent reason, and despite your desire to do otherwise. What do we mean by need? And by less than would be beneficial? We are defining need here in its most basic sense: an amount that is enough for you to provide yourself with food, shelter, and clothing of decent quality on a regular basis. That’s the amount of income you need. While owning a co-op on the park, buying a new car every year, or having the money to pay for your daughter’s medical education at Stanford might be pleasurable and even desirable, they are not needs. Beneficial is more open to interpretation. For our purposes, it means enough for you to meet your basic needs, with some left over to spend on items or quality that exceed those needs, a bit more for recreation or relaxation, and some to put into savings. As a threshold definition, that is what we mean by beneficial. Under-earning is not synonymous with having a low income, though it often involves one. Many people earn a low income who are not under-earners. They bring in more than they need to cover their basic expenses, and provide themselves with some pleasure and savings, and they display few of the characteristics common to under-earners. Nor is under-earning synonymous with underachieving. People can achieve less, even a great deal less, than their potential and still earn more than they need or than is basically beneficial to them.

He goes on to say:


“Nor, finally, is under-earning synonymous with underworking. Most under-earners, on the contrary, work very hard. They simply make sure, in some way, that what they get back from their effort is either not enough or just marginally enough to get by on. The argument can be made that under-earning, like other self-damaging behaviors, is a psychological and spiritual illness.”

What I have found is that this can present as a stronger than average "trance of unworthiness", to use a phrase from Tara Brach.


Let’s move on to point number 2: We usually do not know how much we need to earn and therefore we don’t know what we need to charge; Meaning we don’t have informed pricing or financial planning for our businesses.


This has impacts on our time too: if we don’t know how much to charge for the amount of time we spend delivering our service, we can have money coming in, but we have to put in 60 to 80 hour workweeks which is also unsustainable.


I’ve run a workshop on how to figure out what you need to earn, and to do this properly you do really need to know what your personal monthly expenses are, what your businesses expenses are, and how much time it takes for you to deliver your offering; which includes all the other things related to it like customer service, marketing, etc.


I will run that workshop again at some point this year but for now, here’s a simplified (and therefore informative but also incomplete) way to think about what you need to earn:


First, in your personal life, what do you spend every month? Meaning, what are your personal expenses give or take? Once you have that number, you need to pay yourself at least that much.


Then you need to figure out what your business needs to bring in. Your gross revenue, meaning the total amount your business brings in, is not your pay. To do this, I will use my simplified version of Mike Michalowicz’s Profit First formula. (The book Profit First is great. It tends to be written for larger businesses than ours but I still highly recommend it).


To distill it down for super small businesses like ours: if you are a sole proprietor, meaning you have no employees, you will pay yourself between 50 and 60% of your gross revenue. The more employees you have, the lower the percentage of your gross revenue is your take home pay, because you have to pay your employees, so your business expenses go up.


Let’s assume you pay yourself half of what you earn (if that sounds shocking, we’re going to do the math and you will probably be surprised). To use nice even round numbers, if you need to pay yourself 8000 a month, your business would need to earn $16,000.


Where does that whole other 8000, or 50% go!? Your percentages might vary, but I will use common ones for the sake of the example:


25%, or $4000 goes to pay your taxes


15%, or $2400 (I’m using a low overhead example) goes to pay your business’s operating expenses.


And 10%, or $1600 goes to what Mike Michalowicz is calling profit, and for the sake of very small businesses like ours, what I am calling our business safety net. This pays for your sick and vacation time, and is also extra money set aside for if you have a sudden expense, or a sudden opportunity you want to take advantage of; For example a training you want to do., or a nicer office that opened up but you have to put down a security deposit- that kind of thing. The safety net savings account keeps you from living too close to the bone so that you don’t wind up with unpleasant cash flow surprises and debting.


That covers knowing what you need to earn, and what your business needs to earn. Also make sure, since most of us are delivering our service ourselves to our clients, that the amount of time it takes for you to deliver your service is correctly compensated. If it takes you one month to deliver your service, that will be priced very differently than a service that takes you one hour to deliver. And even if it does take you an hour to deliver your service, how many can you reasonably do in a week? How many would you ideally have the energy for in a week without pushing your energy to its limits all the time?


Remember you don’t only deliver your offering (at least most of us don’t only do that), so factor in time working on your business and not just in your business. Returning emails, scheduling people, marketing outreach, etc. All the things.


If this is bumming you out. It’s not my intention! But I am all for bracing sobriety if it helps us to be honest and better meet our needs. So… that’s just a personality thing with me.


On to my last point from earlier about the 3 common pitfalls around money in small service based businesses: We do not set up systems so that finances are tracked and taken care of; and then we wind up short when it comes time to pay taxes, take a vacation, or take some sick or personal time off. Or we simply don’t know where all the money goes and why we don’t feel like we’re earning enough even though our revenue numbers look pretty good.


Fortunately, what we just covered already gets the ball rolling on this. Once you truly know what you need to earn, and where your percentages of revenue are going, you are well on your way to keeping track of your inflow and outflow.


I recommend, as does Profit First, that you set up separate accounts for all of these categories, or what I like to call cookie jars, for your business: Your compensation, your taxes, your operating expenses, and your business safety net savings. Sure it’s an annoying task at first, but this kind of clarity comes is priceless once the annoying set up part is done.


All of your revenue will usually flow into your operating expenses account- otherwise known as your business checking account (if you don’t have one and you use your personal checking account- set up a business checking account!).


Then twice a month, or once a week depending on your preference, you can send your compensation, (your pay), to your personal checking account, your percentage to your taxes savings account where it sits until your quarterly payment date comes around, and your percentage to your safety net savings account, where it sits until you need it.


Those are solid systems!


When it comes to tracking the inflow and outflow of your revenue, this can be done in a number of ways: you could go with cloud based accounting software like Xero or Quickbooks (I like Xero), or you can just set up a Google Drive spreadsheet or use excel. It doesn’t have to be overcomplicated with a small business. So whatever is easiest for you.


If you’re still with me after all of this numbers talk. I know. This is profoundly stressful and unappealing for most of us. And it can feel like this giant overwhelming task. But I swear you can make friends with things like financial planning and tracking. And if that is too heavy a lift for you, you can plan to get some support maybe from a bookkeeper or a financial counselor or just by going through DIY resources like what Xero’s bookkeeping platform provides, or like Mike Michalowicz’s book Profit First delivers, or a Profit First professional who can get you and your books or accounts all set up.


What I’m primarily advocating for is to make this, the money stuff, a part of your business. Make sure it is something you pay attention to and prioritize. Not because you want to buy your very own triple decker yacht, but because you want to create something beautiful with your business: The ability to have nourishing sufficiency for yourself and for anyone else who interacts with your business whether they are an employee, a subcontractor, or a client.

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