How much do you need to earn to live comfortably? How much do you have to earn to support that income? Assuming we are talking about a one-person business lets play a numbers game.
First some rules:
1. The business has to support itself and its expenses.
2. The business has to create at least two reserve funds for a rainy day and future growth..
3. It has to support its owners.
Start with what you want to pay yourself. Make it comfortable. A family of four can live comfortably enough on $60,000 a year. This is what you want the business to pay you.
Next add up all the expenses. Treat them as separate entities from your personal income. Add up EVERYTHING, including car payments, mortgages, utility bills and any other expenses you can think of. For the sake of playing this game, the additional expenses add up to an additional $30,000 a year.
Now comes the scary part. Multiply the total, $90,000 by six. The grand total is $540,000. That is what has to be earned each year to support all the operating costs, a personal salary, and the creation of both a rainy day and investment fund.
The $540,000 is a long-term goal and can be income from any number of sources like direct sales and even residual cash flow.
While the formulas can vary from company to company, what I’ve just shared is a general guideline for determining the value an employee brings to the table. The actual multiplier depends on a wide variety of factors, but multiplying by six is a good starting point.
The formula I just explained is designed for a one-person shop. The larger the company, the greater the multiplier. ($90,000 x 15 = $1,350,000, or $90,000 x 25 = $2,250,000.)
When I worked at a major corporation in Boise, Idaho, one of the senior vice presidents taught me to crunch the numbers until they scream and tell the truth. Then, and only then, could I develop a strategy to reach the goal and sustain the necessary momentum.
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