The 20/20 Yardstick is this: 20% pre-planned profit, 20% personal income saved. Do both and you’ve got a simple strategy for becoming wealthy! There are 5 main ultimate benefits:
1. You’re able to make strategic decisions
2. You’re able to take abundant free time
3. You’re able to require new capabilities
4. You’re able to be independent of any situation
5. You’re able to concentrate on long-range goals
Savings = Not current revenue or borrowed money – are what make all these things possible.
“Use savings as the primary yardstick for entrepreneurial success!”
Money. This one word perplexes entrepreneurs more than any thing. Money. It can ruin careers, turn people into Mr. Hyde, flow out quicker than it comes in, cause stress which can cause more of the same – less money. Money is a topic that must be addressed head on without dancing around it, if a business owner is going to make a jump in growth. Most entrepreneurs don’t want to look at it, they just dance around it blinded by t heir positive ideals that keeps t hem from knowing the truth about their money. Most don’t want to check the amount in the account, because..well they might find out what they fear – they have no money. How could it be that all that money comes in, and where does it all go?
So you had a great month, new clients, more inflows of cash. You’re feeling that this month you’ll get ahead, finally you’ll be able to purchase that new solution, that new machine that’ll break open the door to new clients! You go to your account at the end of the month and POOF ! It’s all gone! Where’d the money go? Imagine this. You’re at a table, sitting there with a handful of playing cards, but instead they’re $100 bills spread like a poker hand. You’re waiting to hand out these bills to your expenses. All the expenses are lining up to receive their portion. First, labor comes up, “hi boss, you got my money?”, you hand him his bills. Then rent steps up to the table, and you hand him hi s..and the rest of the expenses all line up to collect their share, in order of typical priority. But way at the back of the line, little profit comes inching up and asks, “Hi boss, any left for me?”, and sadly you say, “I’m sorry, No.” Profit is always last. If you had anything left over it would’ve gone to little profit, little meek profit who never gets his meat on the bone. He just crawls away hungry. Prof it is like a homeless person. He’s always hungry. He always wants money. But you have nothing left from him, he’s not priority, because you’ve been living in the land of reacting to whatever screams the loudest. That’s where you put your attention. Great in the short term, deadly in the long term. And a sure-fire cause for losses in freedom and mobility.
Now Imagine this. You’re wanting to make that next big leap in your business. But you’ll need new computers, a new production assistant, a new locale, and all the above. Instead of waiting on the next BIG month to furnish EXTRA cash flow to turn that corner, you have the money right in the bank within your reach. Your working capital actually pays for that jump, and allows you to invest in the much needed resources to level up. Your company is profitable, in fact it’s ahead of the curve in comparison to others in your industry. Your competitors often wonder how you’re doing it, are you a magician? You’re working on the next breakthrough in your industry, and getting to all the objectives and actions to support your goals. You’re taking loads of free time to be with loved ones, and you just love your life as an entrepreneur.
That scenario you just heard – You can do this. It’s simple. It’s called Pay your Company first! Much like socking money away from your paycheck or salary at home, you would do this with your company’s cash flow. For example, come up with a desired profit percentage – 10, 20%. Pay that first. Pay profit as a first item of expense. Every check, or bi-weekly or monthly, take that designated amount and set it aside in another account. Here’s the secret – make it an automatic draw, because you most likely won’t do it, and second, DO NOT TOUCH IT FOR AT LEAST 6 MONTHS!
Now, here’s the tough part. It’ll require focusing a new habit of budgeting and operating within the remaining amount. For example, your monthly revenue is $1M per month. You plan your profit as a first item of expense at 10%. You pay your company first by opening a money market fund. 100k goes into that fund, and you have 900k to operate with, given your fixed and variable costs. You’ll need to sit down with your accountant or controller before implementing this to get clarity on a budget and gameplan. You’ll need to figure out creatively, looking over all your expenses and accounts, how you’ll do this. If you find the initial % too steep, lower it, then ramp up in 6 months to a higher %. Do the same at home. If you’re used to earning 50k per month, pay first 20% of that to yourself, your savings, then create a home budget to live within your means on the rest.
Just imagine in your business having saved $100k per month for 6 months, that’s 600k in working capital set aside for that serious jump you’ve been considering. Now, you’ve wiped out private lenders, banks, and other outside sources, you don’t pay any interest! You gain interest and re-invest the money back into the business. Remember, do the same on the personal side, sock away 10-20% of your personal income every month, without fail. Doing both is where the real power of this habit pays it’s dividends.
And remember this – you’re not net profit. In your business, your money is not to be drawn from net profit. You should consider yourself a fixed expense t hat you take out monthly, by first forecasting a conservative revenue amount, then isolating y our portion. This way you avoid putting the handkerchief across your face and staying “stick em up buddy!” to your business. You avoid raping it of it’s ability to fund it’s future. So quit robbing your business, and separate w hat you draw from it to disperse your income to you. This helps you separate your self from your business, and actually act in the true role of a business owner, not a self em ployed individual. Your business is a cash flow machine, and you can bring good or bad habits to it to either ramp it up, or hinder it.
Now get this..what if you want to sell your business eventually? Can you imagine how profitable you’ll appear this way? How exciting! What could you get fo r it, showing consistent profits? What would it be worth? How about adding your draw plus net profit and multiplying that by two or three to valuate the business. This imaginary exercise can be fun. And that’s one way to valuate, depending on the average “multiple” in your industry. It’s usually two to five times owner’s draw plus net profit minus any business debts.
After 6 months, sink fund your influx into the account. In other words, deposit the regular amount, but only credit 90% of it. Sink the 10%. This way, you’ ll never deplete what’s in there, because you’re always using less than is in the pre planned profit account. It’s a fun and productive game to play to avoid depletion. You’ll only write checks with your accounting software’s posted amount, not the actual amount.
By the way, America’s millionaires sock away 20% of their income. In Stanley and Danko’s best seller “The Millionaire Next Door”, they found an interesting fact. Millionaires are enormously frugal. They sock away 20% of their earnings. Again, the automatic draw is necessary along with an area to invest, real estate, stocks, which ever you choose.
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