One of the biggest questions I get asked is this – how much do I need to run my business? It seems like a simple enough question, right?  And depending on your business, it can be an easy “X + Y = Z”.

But for most businesses, finding this Magic Number is a bit more convoluted.  Why? Well for a few reasons:

VARIABLE COSTS

In this blog, we talked about the difference between variable & fixed costs – jump back to give it a read for a refresher.  Variable costs, or Costs of Good Sold, are those costs that increase or decrease depending on how much you’re selling.  Because these numbers move constantly, it’s hard to say that you need $1000 a month, for instance.  This month you might need to get $1000 of inventory, but next month, it’s the start of your busy season and you need $2500.

the solopreneur bottleneck

Unless you’ve built up a strong team around you, chances are that 60-100% of your business to-dos are falling onto your shoulders (burnout anyone?).  When you’re in the early stages this can be manageable on your own, but the bigger (and busier!) you get, the less realistic this becomes.  You’ve got 2 choices – (1) take on less work / less sales, or (2) hire help.  Well, I guess technically there’s a third choice, but being a workaholic, stressed and sleep deprived is not something that I will condone [ahem…she says to herself].

Should you decide to hire help, these become NEW costs that you now need to cover.

Financial Reports Don’t Help

Now I won’t say that financial reports are COMPLETELY useless.  Depending on your business, they work great.  BUT if your business relies on bulk purchasing inventory to resell, things get messed up.  The other thing that might mess up your ability to use your financial reports is if you offer “terms” on your invoice payments.  For example, do you give clients 15-30 days to pay their bills?  If you’re in retail, this isn’t a big deal – someone buys something and pays for it before leaving the store (virtual or IRL).  If you’re working more B2B (business to business), you will likely have delays in getting paid.

So…if all these things make answering this question difficult, how the heck are you supposed to know?!? Here’s what I do to get my key numbers.

Your Overhead

Look back to this blog for a reminder about overhead.  These are your expenses that don’t change; they don’t care if you make 10 sales or 10,000.  They will always be the same.  So, this first step is to add up all these expenses; things like rent, utilities (phone), subscriptions, vehicle expenses, salaries, office supplies, etc. Let’s say that your overhead number works out to $8,500/mth…hold tight to that number, we’ll come back to it.

your COGS percentage

So, what do you do about a constantly moving target?  Well, fortunately, this moving target isn’t so random.  The reality is that your costs are generally pretty stable as a percentage of your sales.  Now I know it’s never this easy, but let’s say you buy pens from some manufacturer for $0.50 a pen, and then resell it to your customers for $2.00 a pen. Your percentage would be:

$0.50/$2.00 = 0.25 or 25%

So, if you sell 300 pens, your COGS would always be about 25% of your sales:

REVENUE: 300x $2.00 = $600

COGS: $600x 25% = $150

your gross profit %

After you’ve done the step above, this one becomes easy.  It’s just one (1) minus your COGS%. 

Using our example, for every dollar that you make 25% goes to your COGS, which means 75% is left over for your overhead, taxes, and profit.  75% is our Gross Profit percentage.

now for the money shot…

All that build-up for this final moment!  Now’s when we get our answer: how much do I need to run my business?

Take your Overhead number and divide it by your Gross Profit % - that’s the MINIMUM sales you need to run your business. In our example:

$8500 / 75% = $11,333 = your MAGIC number

In order to cover ALL your overhead, and ALL your COGS, you need to make over 11K a month.

Boom. Mic Drop. Peace out.

Your job is to now hit that Magic Sales Number each month, and check in on your overhead and COGS now and then to see if they change.  I also like to pad my overhead number a bit to plan for things like:

• GST & Corporate/Personal taxes

• One-time, big expenses (like insurance or annual subscriptions)

• Inventory buys (cause who’s ever just bought ONE pen from their manufacturer)

• PROFIT – we are in this to make money right?

Your calculator awaits!  Go to it, my friend.