Measuring Business Success in Real Terms!
Your small business is up and running and things seem to be going well. You have grown steadily the past few years and managed to survive the worst of the downturn. So now what do you do? Common wisdom would suggest that you focus on revenue and maximising sales. This means borrowing money, hiring more staff, take every order/customer that comes along. As long as money keeps coming in everything is hunky dory! What’s wrong with this path?
Well firstly its the money that’s going out that’s as important as the money coming in. Sales means nothing if you are spending more than you earn. Profit is king and Cash Flow is Queen! We will discuss a few of the key issues to hand including:
- Why every business leader should pay themselves what they deserve;
- Why you should avoid debt wherever possible
- Why you should pay your staff like a winning sports team would.
Business Owners Should Always Pay Themselves The Correct Wage!
Here’s a surprising figure: 90 percent of small business owners pay themselves less than a fair market wage. In many ways this is a reasonable thing to do. After all, by lowering their own wage costs, business owners can make pre-tax profits look much healthier. But despite this, business owners should always pay themselves the correct market wage. There are two reasons why this should be the case.
- First, not paying yourself (or your employees) a market-based wage actually undermines your business. Pre-tax profits and labor expenses are key figures which affect important financial measures such as labor productivity or the percentage of pre-tax profits to revenue.
Artificially altering profit levels could affect your ability to grow your company. Also underpaying wages can be viewed as a tax evasion measure which Revenue have been more closely looking at in recent years. Revenue is increasingly choosing to audit firms suspected of employing this practice.
- Secondly paying yourself a market-based wage is crucial when it comes to selling your business or making an exit. That’s because a firm’s profitability is a key factor in determining its fair market value. So when an outside party looks at your books prior to purchasing your company, artificially lowered wages could cast doubt on your company’s value in the eyes of a potential buyer.
Also, paying yourself a market-based wage from the start will spare your business cash flow problems (and the nasty surprise of diminished profits) if you decide to make an exit and replace yourself with an outside CEO who’s expecting to earn market wages.
Contact Us at Avid Partners on 0818 303087. Email us at advice@avidpartners.ie. We love to hear from small businesses and how they are doing!
Extracts from Simple Numbers, Big Profits. Blinkist Blog
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