“Purpose is the reason for your journey. Passion is the fire that lights the way.”
Anonymous
Recently, I had an opportunity to speak with an entrepreneur who is ready to take the next step in their business journey. From beginning to end of the conversation, there was no shortage of passion; however, there was much hesitance to talk about money. Much of the focus was on serving the customers and delivering the highest quality service. Is that a bad thing? No, not at all.
Not that passion isn’t great. As a matter of fact, it is, without a doubt, a key ingredient in the business mix. Passion represents your ‘why’ for embarking on the entrepreneurial journey and can be the fuel to keep you going even when you hit the rough patches.
When someone asks the question, “what drives you?” usually, the answer is “passion” or my love for this or that. One of the most common responses I hear is “I like or want to help people” Now, you may disagree with this but in my opinion, it is quite difficult to stand on one leg.
Passion by itself, will not get you to the place of achieving your desired business goals. It takes money along with a strategic plan, plus a few other factors to establish and operate a successful business. From the planning to start-up phases, there will be some costs involved that need to be embraced.
With some types of businesses, there can be research and development (R & D) costs, which are necessary as a precursor to launching. Feasibility studies are sometimes conducted to determine the cost versus benefits of taking on a certain venture.
Now not every business will need these two above-mentioned costs, but good planning should include some level of due diligence. You want to know whether there is a ready market for your product or service. Additionally, you must calculate the cost of getting your products to potential customers or your target market.
What Is Your Desired Business Outcome?
The short answer to the above question for most is to make a profit or more bluntly stated, “to make money!” For that goal or outcome to be achieved, a well-executed strategy, which includes budgeting and forecasting, is central to the process.
You may have heard this as well that it takes money to make money, right? Yes, there are costs attached to your success along with the investment of your time, skills and of course, your passion. Whether you are selling a product or offering a service, there are some foundational factors to consider.
You will need to think like a business-owner and begin to see things in dollars and cents. In other words, you must speak the business-money language. For example, terms like profit margins, cost of goods sold, gross profit, net income are just a few to get acquainted with early on.
A budget is a very powerful tool to have when planning as I consider it to be your roadmap or compass. You can use it to capture your projected income and expenses, which will give you a sense of whether you will make a profit, loss or just break-even. In your cost analysis, think about these two main categories of costs which are:
- Fixed Costs: These are incurred regardless of how much you sell or produce each month.
- Variable Costs: As the term suggests, they can change based on activities and needs.
Paying Yourself as A Business Owner
When can you consider paying yourself as a business owner? This is a question that can be difficult for some to answer as it may depend on a few factors. The type of structure of the business plays a role in how the owner is compensated. For example, Sole Proprietors and Partnerships, which are considered “pass-through entities” takes a draw rather than a salary.
The owner(s) of a Limited Liability Company (LLC) that makes the S-Corp designation and C-Corporations, can put themselves on the payroll of the business and take a salary. Keep in mind that the issue of “reasonable compensation” is on the radar of the IRS, as some business owners do not abide by this principle.
As a tactic to pay minimum payroll taxes, some take less salary and additional distributions, since the tax liability can be lower that way. This can be problematic. To pay yourself reasonably as a business owner, there should be a level of profitability or a path whereby the business can generate sufficient revenue to meet operating costs.
A question I like to ask during my consultation sessions with aspiring entrepreneurs is, “do you plan to pay yourself and how much do you need to maintain your cost of living?” As important as this question is, there isn’t always a ready answer to it because personal budgeting is also sometimes non-existent.
Now you may be asking why all this matters at the beginning, or you may also be thinking that you will figure it all out as you go along. Well, I am sure you would agree that trying to learn how to fly an airplane while it is already in the sky can be risky, right? Yet so many entrepreneurs take off in business without learning the basics, such as a simple cost analysis.
Skipping that important step can impose limitations on their ability to grow and scale or even survive for that matter. So having said all of that, passion is absolutely at the bedrock of your business success but, it cannot stand alone, nor is it enough.
To achieve sustainability, a strong financial foundation is crucial. As you make key decisions on profit assumptions or dream about sailing the pacific on your well-earned vacation, take the time to put the number on paper. Do remember that numbers will tell you as much as you are open to hear.
I saved the best for last, taxes!!!! Don’t forget to plan for taxes as it is your responsibility as a business owner to pay your taxes quarterly.