Think about retirement now in order to save the money you'll need then
How much profit is enough?
Saving for retirement.
Do you enjoy your business? Is your business profitable? How many of you knew the French translation for “enjoy” is “profitez”? I think you see where I am going. I’ll ask again, just a little differently: How much profit is the right amount of profit for enjoyment? This is the personal question each of you will need to answer for yourself. However, I’m going to give you some real food for thought.
Let’s start by outlining some basic principles to think about as a business owner:
- The entrepreneur.Entrepreneurs or business owners earn money based on the results of the business they own.
- The employee.Employees, on the other hand, earn money based on their time and/or effort no matter what the results of the business.
This defines the backbone of the risk/reward economy — which should be balanced. An entrepreneur assumes a higher level of risk and is, therefore, entitled to earning a higher reward. Whereas an employee’s risk is lower, which logically dictates a lower reward.
You need to make a profit …
You own a business. Merriam-Webster defines a business as:
“busi•ness: noun, often attributive: the activity of making, buying, or selling goods or providing services in exchange for money.”
The key phrase in the definition of business is “in exchange for money,” which for me should be replaced with “profit.” What does Merriam-Webster say about that?
“prof•it: noun, a financial gain, esp. the difference between the amount earned and the amount spent in buying, operating or producing something.”
The key phrase here is “financial gain.” When you subtract your costs from your sales, you should see a financial gain. When I talk to contractors, I make sure they don’t confuse business with profit. Too many residential service providers still believe business and profit automaticallygo hand in hand.
Do you remember Montgomery Ward? Have you ever rented movies from Blockbuster? Did you miss Hostess Twinkies in your lunch? These companies are perfect examples of businesses that exchanged goods for money but made no profits.
Businesses in the same industries — Wal-Mart, Netflix and Mars Candy — are businesses with profits. Why are these businesses still around today? They have profits and can enjoy the excess.
To make your business enjoyable …
Now I’m getting into the heavy lifting for this article. It’s time to analyze your company’s results. Look at last year’s results. Ask yourself these questions:
- Did you make money on the bottom line? (Calculate this after you paid yourself your own annual salary.)
- Did you miss big on any lines?
- Did you miss just a little on any lines?
The problem with the assumption that good business (sales) equates to profits is when sales are good, we are tempted to take our eye off the ball. We can overlook some of our profit misses, whether we miss big on just one line or slight misses on a few lines, which don’t seem material until you combine them into a significant miss.
To fully enjoy your business and maximize your profits, make sure you or someone in your company is accountable and focused on each line item on your income statement. If it’s not you, then specifically and purposefully assign it to someone in your organization who can directly impact that item.
Don’t assume a shortfall in gross profit dollars in one quarter will work itself out with more sales in the next quarter. Evaluate the problem, identify if it’s a one time or recurring issue, and assign someone to plan and execute a strategy to recoup that money. Remember, “financial gain” is the key phrase when measuring your results for profit.
And retirement will be enjoyable, too
So, how much profit is enough profit? I mentioned earlier that this is a personal question, so you’ll need to look at your own retirement plan. I was speaking with my mentor, Frank Blau, recently and he is very concerned the message isn’t getting out to younger contractors. We are all planning to retire at some point — even those of you just starting out. Knowing why you started your own business and what you envision for your life are important goals to keep in mind as you operate your business.
Since you don’t have a corporate retirement plan set in front of you, you need to start the dialogue with yourself now with one simple question: “How much money do I need each year when I retire?”
For example, let’s assume you need $100,000 per year, because you want to have some freedom when you retire, right? Do you want to travel? Maintain your hobbies? Visit grandchildren? For my wife, all those are bundled into a wonderful little girl named Angelina, who just turned one.
Where will this money come from? The money will come from your retirement plan. If you are not putting money away into a retirement plan, you are screwed and you will never reach this goal.
In order for you to earn $100,000 in your years of retirement, how much money will you need in your retirement plan? If you make 5% annual return on your plan, then $100,000 / 5% = $2,000,000. You will need $2 million dollars in your retirement plan for $100,000 in annual taxable earnings. Yes, you will be paying taxes on this income.
How much do you save today to have $2 million dollars at the time of retirement? It depends on your current age and at what age you plan to retire.
You need to know now where this money will come from. How many of you are now more focused on making a profit today? Outline what your plan is going to be right here and now!
I want you all to enjoy your retirement. You have taken the big risk. You started your own business. You have employed many good people and then provided them with an enjoyable retirement. Now it’s time for you to earn your reward. Profitez!