I attend several Amazon and ecommerce industry events every year. And at each one, whether I'm speaking to a group or just engaging in casual conversation with some of the attendees, at some point the discussion usually turns to the idea, the hope, the goal that many entrepreneurs have--leaving their "day job." Some have made that leap and are wondering if they jumped too soon; others are testing the waters and trying to figure out how and when they can take that huge step.
As we talk, I'm always asked how to make it happen. My answer is always the same. By implementing the Profit First cash management system in your business, you will have the exact criteria you need to get ready for that momentous day.
Essentially, you reverse engineer your numbers, beginning with the amount of salary that would be necessary to uphold your family and maintain your lifestyle. You then check the benchmark numbers pulled together by Mike Michalowicz to see where your business sits when compared to a successful business. Below is a chart from Profit First for Ecommerce Sellers that will help with this comparison.
For instance, let's say you require a personal salary of $75,000. You can now figure the other numbers in the formula as if you know what your gross profit is. In this case, the gross profit is an approximate value for Real Revenue indicated in the chart. If your business is sound, these two numbers should be pretty close. If the numbers aren’t close, then t's too soon for you to leave your day job. Instead, you need to begin making improvements to your business now to better prepare for that big day.
Below are the calculations we're using for a business at the Gross Profit level of Column A in the chart above, in the range of $0-$250K.
Using $75,000 as your needed salary / 50% from the chart = $150 ,000, which is the Real Revenue requirement shown in the chart’s range of $0-$250k. To sustain a healthy business, it is necessary to put back money for profit, taxes and operating costs based on the levels displayed in the chart.
150,000 * 5% = 7,500 Profit
150,000 * 50% = 75,000 Owners Pay
150,000 * 15% = 22,500 Taxes
150,000 * 30% = 45,000 Operating Expenses
So, how does your business compare to these numbers?
To double-check against your top line revenue or gross sales number, all you have to do is divide your real revenue number by your gross margin percentage.
150,000 / 30% = 500,000 Top line revenue or Total Sales
Based on our personal experience, an ecommerce business needs to stick to about a 30% gross margin to be able to completely maintain the overhead that is mandatory to operate on a successful level. If you are quite a bit below this number, consider your action plan and think of ways you can increase your gross margin before you start to rely completely on your ecommerce business as your only point of revenue.
Since the Profit First system lays out these key benchmarks, you will learn to see what areas need to be changed to make your businesses work smarter. The idea behind moving away from your day job is to gain the independence and the flexibility that an ecommerce company offers. Investing continuously in a cash-eating monster is no one’s ideal, so crunch the numbers and be positive that your business is at the right level of profitability before you decide to make that life-changing change. And while you’re at it, apply the Profit First system to your business so that taking a salary and making a profit become a habit! Operating your business based on the Profit First approach will help you take a step forward in achieving your dream job and improving your ecommerce business even faster.
If you’re interested in learning more about creating profitability in your business, check out my book, Profit First for Ecommerce Sellers. It's available now at Amazon.com and other book retailers.