To answer the question “How much profit should my business make?”, we need to look at the market cost of the resources it uses.
You probably already pay market prices for your supplies and staff but the two areas that may be heavily subsidised are what the business gets from its owner – management time and money invested.
Lets put a value on your time.
The Market Cost Of Your Time
I want you to look at what you do in your business – all the many hats you wear from salesperson, copywriter and Internet expert…to the things necessary to deliver your product or service…to the administration and bookkeeping.
List Down Activities, Estimate Time And Value
List down what you do each week or month and make an assessment of the time you spend on each task.
I find it best to think about things I do every day, every week and then every month so I catch all the regular activities.
Add up the time and compare to the total time you spend working, add an unproductive time estimate – we probably all do things like surfing the Internet or chatting to friends during work time – and adjust your other estimates if necessary.
If you work 60 hours per week, I want you to account for the 60 hours.
Then I want you to grade those activities in value based on how much it would cost to get those things done by someone else. To keep things simple, I use three categories when I do this – high, medium and low.
Then set market rates for each grade – I tend to use £100, £50 and £20 per hour but it will depend on what you do and what you would have to pay someone else.
For example in my one-to-one coaching, I use £100 an hour because if I became overloaded and decided to outsource, I’d pay about £100 an hour to another good coach. I’d charge clients more than that because I want a profit to cover all the other things I do.
But when I am doing my bookkeeping, I use £20 an hour.
I know I shouldn’t be doing it because there is one simple rule.
To earn more, you need to do more higher value work.
I’ll say that again because it is so important.
To earn more, you need to do more high value work and less of the low value work.
I can earn more by finding a bookkeeper and taking those hours saved and using them for more one-to-one coaching.
It would be like me giving someone £20 and them giving me back £100.
Personally I don’t… because doing my own books helps to keep me grounded and my business is so simple, it doesn’t take very long. But that’s just me and my personal foibles.
Estimate The Cost Of Your Money Invested
As well as estimating the cost of your time, I also want you to make an estimate for the money you have invested in the business.
I explained you can look at how much you could earn elsewhere at a similar risk or how much you would have to pay to get the money from a bank.
Either rate is OK – I just want you to think like an investor and demand a rate of return on your money.
Return to P1M2 What Is Profit