If you’re in business for yourself, whether you’re planning your grand opening or a 25 year veteran, I wanted to take a few moments to discuss your expectations.  Science has shown that our expectations can have a significant effect on the outcome of an experiment, which is why scientists prefer double blind testing.  That’s every bit as true for the entrepreneur as well.

Many people are just looking for an income, and the concept of business seems so simple – buy low, sell high.  The purpose of a business is to generate a profit, and most people, especially business owners, think they understand that.  But there are a few assumptions, or traps, that get in the way of far too many business owners.  They really seem like common sense, which makes it so easy to fall prey to them.  Don’t let them destroy your profits.

1) I’m the owner, I don’t need a salary.

This cuts right to the core of what it really means to own a profitable business.  The successful business owner deserves to get paid for investing in the business, taking the business risks and being the creative force behind the business, whether she or he actually works in the business or not.  In addition, all employees of a business deserve to get paid a fair wage for the work they produce.  You would not expect an employee to continue working for your business if you stopped paying them, would you?  If you’re a business owner and you work for your business, you should get paid just like all of your other employees.  Conversely, if you do get paid a fair salary, and there are no profits at the end of the year, you don’t own a profitable business.   You might own a good job, but that’s not the same thing as a profitable business.  It is far easier to sell a business than a job when the time comes, and often selling “the job you own” is downright impossible.

2) Gross Profit is still profit.

I prefer the term “Gross Margin” over “Gross Profit” because I’ve seen too many business owners confuse gross profits and net profits.  “Gross Margin” is your revenue minus your direct expenses.  “Net Profit”, or simply “Profit”, is your revenue minus all of your expenses.  If you’ve paid your direct expenses, but you have not paid your overhead, it’s not profit!  I understand that it’s a whole lot easier to tell a business analyst that you’re making a 30% profit instead of showing a 2% loss, but you’re not fooling anyone but yourself.  If you haven’t factored in ALL of your expenses, it might be gross profit, but it is not profit.  You cannot fix a problem until you acknowledge there is a problem.

3) Cash Flow just means Profit, right?

Wrong.  Profit means your total expenses were less than your total income, but remember that profit is not always in cash.  Profit is sometimes visible as an increase in your bank account balance, but it can also be seen in other areas, such as an increase in your accounts receivable, an increase in your long term assets, or a decrease in your debts.  Cash Flow is all about when the money comes in, and when it goes out.  They are two separate things.  A profitable business that does not have the cash it needs to pay its bills can go just as bankrupt as a company with steady losses.  That’s why it is so important to manage both your profits and your cash flows.

Click to go to part 2 of this post

The Professional Hobbyist: This person started out doing something they love as a hobby, and then they opened a business so they could get paid to do it.  They take great pride in their work.  You can recognize this person because they have all the newest and best tools and materials, and they love to show you.  They have invested quite a bit of money into their operation, and anytime the business has extra cash that could be profit, they use it to buy even newer and better stuff, even though they’re not using half the equipment they already own.  After all, they think that the capacity to do even more and even better work will eventually lead to bigger and better profits.  However, no matter how long they have been at it, their business has never shown a profit.

The Professional Hobbyist will tell me “But Dan, look at all this great, expensive equipment I own!”  Yeah, that’s great.  If the purpose of your business is to own a bunch of equipment that hardly gets used and declines in value year after year, then you’re quite a success.  If the purpose of your business is to make a profit, and it should be, then something needs to change.

The Job Owner: The Job Owner used to work for somebody else, and is now self-employed.  They usually keep costs down, have few employees, and buy equipment only when it is really needed.  Unlike the Professional Hobbyist, anytime the business has extra cash, the Job Owner takes it home, usually in the form of a paycheck.  Successful Job Owners make a fair wage for the type of work they do, but rarely, if ever, make much more than that.  The Job Owner and the business are inseparable.  If the Job Owner left the company, even for a month or two, there is no way for the business to survive.  In addition, if the Job Owner hired somebody else to do his or her work, there would be no money left for the Job Owner to take home.  The major difference between the successful Job Owner and an employee is the Job Owner takes on all the risk and all the stress with no additional compensation, and when things get tight, the Job Owner stops paying himself, while most employees would not tolerate being treated like that.

The Businessman: The businessman (male or female) understands that business is all about producing profit.  The business simply cannot survive without making a profit.  They also understand that the business owner gets paid for taking the risks, investing in the business, and being the creative force behind the business.  The business has work that needs to be done, and therefore, the business must hire people and pay them a fair wage to do that work.  If the business owner works as an employee of the business, as is the case in most small businesses and many larger ones, the businessman deserves to get paid a fair wage for the work he or she produces.  This is a necessary business expense that needs to be paid to somebody, and has nothing to do with the profits the businessman earns for owning the business.

Now, I’m not talking about how money is taken out of the business.  For example, assume that the businessman makes $75,000 per year, which is a fair wage for a certain type of work, and the business produces a $50,000 profit each year.  If the business is incorporated, the businessman could choose to take home the $75,000 through payroll, and the $50,000 through profit distributions, or she could choose to take the entire $125,000 via payroll.  Either way, the owner makes $125,000 per year, but the business only makes $50,000.  If the owner makes a fair salary, with no profits above that, then the owner is not a successful businessman at all – they are just a Job Owner, and they’re taking all the risks that go along with owning a business without being paid any more than an employee with zero risks.

So, what type of business owner are you?  Whichever type you currently fall into, the first and most important step to becoming a successful Businessman is getting crystal clear on your expectations.  Decide exactly what you want out of your business, decide that you deserve it, and fully expect it to happen.  Only then will you be in a position to make it happen.