Bottom-line, what’s that? Also known as net profit or net income, your bottom-line is the amount that remains after you subtract all the expenses you incurred from the amount you earned from the sale of your goods or services.
Now the real question is, are you included in that calculation? In other words, are you paying yourself?
As a startup, there are several numbers that you should understand (and compute) including:
- Startup Costs | The costs necessary to get your business up and running.
- Ongoing Costs | The costs necessary to keep your business running.
- Gross Profit | The amount remaining after you subtract the cost of goods sold (variable costs) from the price of your goods or services.
- Break-Even Point | The amount of gross profit necessary to cover your operating expenses (fixed costs).
Speaking of variable and fixed costs. Let’s take a moment to talk costs … we know it can be confusing.
In many startup resources, variable costs are the costs directly associated with producing your good or providing your services. The more you sell, the more variable costs you will incur (and vice versus). We refer to these as costs of goods sold (COGS).
Fixed costs, on the other hand, are the costs you will incur even if you don’t have any sales. Fixed costs don’t necessarily increase (or decrease) because you sell more (or less). We refer to these as operating expenses.
For the numbers nerds, variable costs are the costs that vary from month-to-month. Whereas, fixed costs are consistent from month-to-month. Not only that, an expense could be a combination of fixed and variable.
Here’s an example … your payroll subscription costs $39 per month plus $2 per employee. The subscription itself is an operating expense (because you are going to pay this whether you sell 10 widgets or 500 widgets) that has fixed costs of $39 per month and variable costs of $2 per employee per month.
Okay, let’s get back on track.
When computing these numbers, startups often forget a critical component; the you part. Yes, I know what you’re thinking … it’s a startup. There isn’t enough for the you part. That might certainly be the case in the beginning, however without the you part, you can’t really figure out if your business is truly profitable (and therefore sustainable).
YOU should be included in the budget to ensure your business will be viable in the future. After all, what if you find out that, in order to achieve your ideal pay, you have to produce some unrealistic amount of widgets? Does that sound like fun? Not to mention, it’s always a good idea to have a number to work towards and track your progress against.
So, what should you budget? In general, there are two ways you can create a budget number for you. There is the essentials method (not a technical term) which is you sitting down and figuring out what you need to live. We’re talking just the bare essentials. The other option is market value. There are several resources available to determine what is reasonable to expect for pay in the marketplace. When it comes to actually paying yourself, you may need to start paying at the essentials level (or even below the essentials level) and gradually increase your pay as your profits become steady. The important part is not to forget about you.
YOU are a critical component of the success of your business, so make the investment in yourself. As always if you need further assistance with this topic, we are here to help.
Just a heads up, there are tax implications related to how and how much you pay yourself based on your entity selection (corporation, LLC, partnership, etc.). Make sure you discuss your pay with your tax professional (or one of ours).