Jeni (00:32)
I'm Jeni Barcellos and I'm joined with my co-host Sandy Connery. Hi, Sandy.
Sandy (00:37)
Hi Jeni, hello everyone.
Jeni (00:39)
In today's episode, we're continuing with our financial intelligence series and talking today about an intentional approach to your numbers.
Sandy (00:48)
Yes, we want to talk about losing the passivity around numbers and feeling kind of almost victim me about it. Like at the end of the year going, did I make any money? Is there a profit? How much can I pay myself? We want you to take charge and stand up and understand what's happening and you get to decide how much you pay yourself or how much profit that you want to make.
Jeni (01:11)
Yeah, I think it's really interesting to realize that you have agency in your financial life and in your business life. And there's definitely some risk emotionally that comes along with holding that agency because it means that you're responsible for how much you're bringing in, how much you're making, right? So if you are passively allowing yourself to make whatever you make, there's this detachment that I think occurs where you then don't have to have responsibility for those numbers.
But when you hold agency for your outcomes, you're responsible both for your successes as well as for your failures. And I think that's a really big leap for a lot of people to take in terms of their mindset.
Sandy (01:52)
Yes, absolutely. And I'm sure people are like, what? Like it does feel very passive. Like I'm going to make how much I make. It's like, no, you can decide, right? You can decide how much you make. You can decide how many expenses you choose to pay. So we're to get into all those details in a second. But Jeni, wanted to talk about the concept of profit and running a business. And when you get started, I just wanted to share a story because I think that
It's really important that as people are starting a new business or thinking about and deciding to start a new business, that they have idea of profit as a goal. So you don't want to start, you don't want to create the situation where you run a business and you are simply paying yourself a salary. This might be something, you know, in the early days that that would be, you know, the goal is like to create a business, to be able to pay yourself a salary. Of course, you also get all the freedom and flexibility of having your own business.
But ultimately you don't want to start a business, have the stress and the extra worry and all the work of building up this business and marketing this business. You don't want to do all of that just for a salary. You want ultimately to have profit in your business. That is why you create a business. Otherwise just go work somebody else.
Jeni (03:09)
Yeah, of course. I mean, I think it takes some time to get to the point where you have the kind of revenue numbers that even make sense to go here. And so we're not talking to those of you that are necessarily in, you know, the first few months of business, although it's important to start to think about these concepts. But, you know, really, by the time you get into year three or so, you have real agency and decision making ability with what you're doing in your business to
do way more than I think you ever thought possible. And I just want to take it back, though, when we're talking about these choices that our listeners get and have to make in their lives around money, I think that so much of our experience as employees and as people who work for other people carries over into our relationship to our business, because especially for women, so many women.
don't do a tremendous job negotiating, for example, when they're hired. And it's just like, OK, I apply for the job. I'm just so happy to get the job. And then whatever you're going to give me, that's fine. I'll take it. I think we, you know, I know certainly I have definitely had that experience to the extent that I've been hired before for jobs. I'm terrible at negotiating. And I've read plenty of books about women in the workplace, including Lean In and all of the pro-Lean In and non-
pro-Lean In books that have followed suit. this is a historical problem that we have, I think, as women and other historically underrepresented people. And so those kinds of mindset issues follow through into your business with you. And so just know that it's not some flaw within yourself. There are reasons why you have treated your...
finances the way that you have up until this point in your life. And we're trying to share with you through this series that there's an alternative way moving forward.
Sandy (05:04)
Yeah, absolutely. want to share a story of a friend who has been running her business for 10 years and throughout that 10 years, she's made less than market value salary. She has had zero profit and of course, like a ton of stress and struggle to get this business, you know, with the money coming in, she's had consultants and front office staff that have been paid and paid fairly, but always she is the last one to pay herself. And so I think
I just want as people start these businesses to take into consideration what Jeni just said and think about what you want ultimately. And I want that to include a really, really hefty profit, you know, probably three to five and beyond years beyond that. Cause otherwise what is the point? And this friend of mine, I was just listening to her story thinking she would have been better off in 10 years to go work for someone else who would have paid her.
you know, a fair market value salary as opposed to struggling and the stress and the worry for 10 years. So we just, we are not the victim of our businesses is I think that's the message here.
Jeni (06:12)
Well, yeah. And also you have to have a real vision behind having your own business or being an entrepreneur. And there's got to be something that you're working towards that you see as worth your time and energy because it is a long game. does take years before you have a business that can support you for most of us, support you and your family. And so like that, you have to be holding on and going towards that. And if you don't have that for goodness sake, for many of us.
the smarter financial decision is in fact to just have a job. And so I think that that's something that entrepreneurs don't want to talk about very often, but you have to have that bigger vision and be working towards that profitability that you're talking about, Sandy, for that even to make sense to take on. I mean, we believe in entrepreneurship. I think it's like a religion to me at this point. I believe in it so wholeheartedly, but I also see that it's not for everyone. Yeah, absolutely. so I think that that's just, that's something to keep in mind that
You have to be willing to take on risk, and you have to be willing to work, I think, in many ways harder for yourself than for someone else in order for it to be worth it and to pay off.
Sandy (07:20)
Yeah, so really in the first couple of years, you are not concerned with profit. You probably most likely won't be profitable, I'd say zero to two, maybe three years. So in year one, or I think we've said often that you're doing great if you break even, that first year is really spent figuring out what it is you're going to offer. You're going to be testing product and service ideas, testing prices, really connected to your end client and knowing what they want from you.
So really it's like testing and learning and figuring it out. The goal in that first year is probably just to pay yourself and then anything leftover is going to be reinvested in operating expenses or possibly marketing. And then once you kind of figure out what it is, like you found something that is the winner that people want and are willing to pay for you, then you start to grow. Then you start to invest into marketing and then you expand and then you are looking at profit. So I wanted to first just talk about this word profit because we want to
present a bit of an alternative way of thinking this. So historically, any accountant, anyone in business, and you've all probably heard this, that the profit is defined by gross revenue. So all of your sales minus your expenses, what's left over is your profit. Right?
Jeni (08:35)
Yes, ma'am.
Sandy (08:38)
And I think that is this passive way of looking at it. So I'm going to work really hard. I'm going to pay everyone else first. And then hopefully at the end of the day, I'm going to have some money that I can call profit. And I think that's a little bit problematic. And there was a really influential book by Michael McCallewitz called profit first. And we saw this book, I don't know, years ago, it really exploded in the online world and in offline as well. It really shook up.
the way that entrepreneurs can think about profit. And so what Michael Mikhailowicz defines it as is he says you can take your gross revenue, so all of your sales, decide before what you want in profit, take that out of your sales and what's left over is what you can pay your expenses for. So this is the way that you decide how much money you wanna make and then what's left over is how much room you, you know,
that dictates what your expenses are. So you're deciding ahead of time what kind of profit you're gonna take.
Jeni (09:41)
Yeah, and it is a really radical way of thinking about this because when you're paying yourself, even if it's something small at first, but it's a percentage and you know it's predictable when you're paying yourself that amount of money, you're not then beholden to all of these kind of, I don't know, shiny objects that we tend to invest in in business early on. You really, you're so much more clear about making sure that you're investing in tools and resources and coaching and programs that
fit in around the underlying goal of your business, which is to pay you a paycheck. And I think that that's super liberating because it's not like, should I invest in this program or pay myself? You're paying yourself. And then investing in the program is like a bonus. think that to me, that shift made such a big difference in my mind. also, Sandy, what I think is so interesting is when we started adopting this profit first mentality, and we can get into the book more, but
it's a lot more complicated and we don't follow all of the intricacies of Michael McKellips's recommendations, but the overall principle we follow. But once we started following that, it turned out that we had not only so much more money to pay ourselves, but we also somehow had all this additional money then to reinvest in our business and these other things. Like it's so interesting how that goes together. And I think that that is why the intentionality matters so much because it's, I think that
You behave differently subconsciously and consciously when you know that you're going to make money from your business no matter what. Even if it's small at first, but it's a reliable percentage that you're going to make, it just totally changes your relationship to your business.
Sandy (11:21)
Yeah, I have an aunt that she used to have a business when I was a child and she would always, I would help her with inventory and stuff. And it was a brick and mortar business, of course. And she would always say like, the most important thing is to pay yourself, pay yourself, pay yourself. And then when I started my business, every time I saw her, that would be her first question is like, did you pay yourself? Are you paying yourself? Because typically brand new business owners will have whatever sales they have.
you know, come in and then they'll pay all their expenses and they pay themselves what is left over, right? And they just hope that there's something left over. And I think that's a hundred, that's backwards. Like we want to like, how much do you want to pay yourself? And then what's left over is what you are going to make your expenses fit in. And there's this like law of empty shelves. Like if there's money there, you will spend it on things, right? So pay yourself first. And then it's like this magical law of the universe that if you have an empty shelf in your home,
it will eventually get filled up with stuff because it's there and it's empty. So it's the same kind of principle with money in the bank. You're going to find things to spend it on unless you firmly decide, I'm going to pay myself first. This is how much I'm making.
Jeni (12:28)
No, it's so true, Sandy. And I'm just even thinking about for Woodland Alchemy, our farmers market-based business that we have in my family and online sales as well. So the first year, we invested a very small amount of money into the company, like, I don't know, a couple thousand dollars. We talked about it on a podcast. I think I don't remember what it is. But it was like small, that low, under $10,000 for sure, maybe under $5,000. And then we did, I think, pretty well, I would say, for a brand new business.
And we invested almost like after paying ourselves back our initial investment, we reinvested like tens of thousands of dollars back into the company in year one in terms of buying because we had to buy raw materials and jars and lids and candle wicks and know, like labels and signs and all this stuff. And so then this year, what I did with this profit first theory in mind, I went into our spreadsheet for the year.
And knowing we have peaks in our seasonality of our business, like almost every business, like our summer is really big. then leading up to the holidays, like right now is really big. I just wrote out how much we were going to pay ourselves each month out of that company. In some months we don't pay ourselves anything. And in the summer and in the fall, we pay ourselves a significant, to me, like extra little bump out of that company. And it's worked. Like with one year of data in the first year again was heavily reinvesting. Basically we made a small investment.
paid ourselves back from that investment and then reinvested all of the rest of the revenue into the raw materials for the company moving forward. This second year in business, like I was able to sit down in January, put those numbers month to month in a spreadsheet, what we were gonna pay ourselves. And I just did it. And I didn't go ahead and buy another still or buy 500,000 extra jobs. there on sale or there's like 15 % off coupon on labels this month or whatever. I made sure that I.
Sandy (14:11)
It's good deal.
Jeni (14:19)
took the money out and paid ourselves out of that business each of the months based on what I projected on our profit from the year before. And it worked. I mean, it worked to a T. And it's amazing.
Sandy (14:29)
Yeah, I think it's a particularly smart move when you do have actual costs of goods like that, because it's so tempting. I have a girlfriend who makes jewelry and so she's always buying beads. I wonder, always wonder, like, wait a sec, are you watching? Like you could spend all your profits on new beads and beautiful gemstones. It's so tempting, right? But you got to pay yourself first. And then you're going to be so much smarter with that money, how you spend it. And so I just want to clarify a couple things. So
you know, this profit first really did shift the way that we look at the business and how we pay ourselves. And in the beginning, as we've just said, like zero to three years, you're probably not going to see profit or not much. And so we really like to take this principle of Michael McCallewitz and apply it to how much you pay yourself, which we've just sort of shared here. So instead it's like gross revenue minus your salary equals your expenses. So maybe in those first couple of years, you're not worrying about what my product's going to be. You're just worrying about paying yourself.
So take your revenue and then decide what you want to take out each month or each year. And then what's left over, you make your business fit into that. And eventually as you increase, you are going to have more money at the end of the month after you pay all your expenses. You've got this, you know, you've paid yourself, you've paid your expenses, and you have this little extra bit of money. And that is where you can pull that out in profit or decide to put it back into marketing or decide to put it into cost of goods or however your business works. But I really,
want people to think about it this way is like, these are my sales, how much do I want? And you can choose a set amount, like a flat fee, or you can do a percentage of your sales if it's unpredictable. And I would probably suggest a percentage in the beginning, like maybe you take 50 % or 40 % of your salary. The rest goes to expenses.
Jeni (16:14)
Mm-hmm. Yeah, and just in my example for our Woodland Alchemy Company, I looked at what our revenue numbers were the year before, so our first year of business, and then I took a percentage and then I timesed it by what those revenue numbers were for year one, and I added 10 or 15%. I can't remember what I did because I assumed we would grow in year two. So I did in fact have a dollar amount in my spreadsheet for how much we were going to withdraw each month of the business.
And I followed it, like I said, to a T. And it doesn't mean that my number of projections were exact in terms of what our revenue was in July of 2020 compared to July of 2019, but it was close enough that taking out that amount of money made sense. And so I think, like, to me, this is so exciting for those of you who have a new business, because once you have one year in business or so, like maybe two years, you then really can like plan financially, year three of my business, I'm planning to pay myself.
X dollars it's not exactly the same as having a paycheck and a job and an external person paying you, but it almost is. mean, nothing is guaranteed in life, right? Like to me, what I pay myself out of my businesses is just as reliable as what I would take in a salary from an external employer.
Sandy (17:28)
I want to share how we did our salaries because in the beginning, like we did zero and it was always our or then we started paying ourselves like really, really, really, really low amount every month. And this, the feeling of that was kind of a little bit of resentment towards the company. Like I'm working so hard and I'm not getting paid and this isn't fair. And then it was all you and you were like, Sandy,
We're going to pay ourselves this amount. I'm like, Oh, are you sure? And we did. And magically we made the numbers to be able to afford our salaries. And then you said, okay, Sandy, we're going to increase our salary every single month for the next, for every month of this year. I was like, Oh, I don't know, Jeni. I don't know if we can do this. And every single month we made those numbers and there is something about, so we have our spreadsheet as we talked about.
the last episode and we write down what our, I write down in the salary, what we plan to pay ourselves every single month. And magically we make those numbers and it's like, this is the intentionality and having some control over what you're doing. When you focus on it, when you see it visually on a spreadsheet and you've got to like hustle down and just figure it out. You're like, I'm paying myself this much money and I have all these expenses. I have to find this revenue. I have to make this work and it happens.
Jeni (18:47)
Well, yeah, and so part of that, I did that strategically and I've never heard of anyone doing it before, but this is where, you know, like one out of every 100 ideas is really brilliant and like the other 99 are terrible. Hopefully this is one of the ones that goes down in the brilliant category. But there's this idea, because if I told you in January what I think we should be making in December, like, we're going to be making this in December, you would have like been like, absolutely not, Jeni. But if I just stair step it up every month.
then somehow magically we reached the goal. Whereas the goal would have seemed ludicrous in January because it's 12 months of a pay increase every month, significant pay increase every month for a year, right? Like, so that's a kind of crazy thing. And there's two of us, it was like double duty giant growth every month. But that's what to me, felt like, you know what, we're gonna catch up.
You know, as founders, and this is, think, true for any founder, right? Your business is like a baby to you in a lot of ways. And you know, like our own salaries are the first thing to get cut if we needed to reinvest in something or make a quick decision to hire someone or to get a project done or whatever. It's like, it's OK. We're just the founders. You know, we'll pay ourselves what's left over. And we decided very intentionally like, absolutely not. done with that. We're the founders. We've grown this thing to where it is right now.
with our blood, sweat, and tears and our hearts. And it's about darn time that we treated ourselves the way we should have treated ourselves three years ago if we had taken venture capital. And I was like, why are we this? Yeah, I want to pay myself the salary I would have taken if we had taken VC. We would have made if we had taken VC. And now we're there. And I'm like, and we didn't have to take VC. Maybe it was worth those three years.
like of not making that much money for those three years so that we could make it and own our company.
Sandy (20:35)
And all of the founders, they sit on the risk, right? Like they've got the risk. Like an employee can come and go and get another job, but the founders have put the money into it and put all the energy into it. So they should get paid. So yeah, I think it's a really good shift of thinking. And I wanted to share, so we're going to make the, not a surprise, the hustle this week is going to be the book.
profit first, but I just want to share, and there's lots of steps to this method and that it's really convoluted and it's a lot of bank accounts. And as Jeni said, we don't do it all, but I think the percentages are really interesting. So he shares, if you have a business from zero to 250 K of the revenue that you take, he says that 5 % of that should go to profit. 50 % should go to your salary, 15 % to tax. And I would just double check that with what you're, with your accountant and where you live.
and then 30 % to operating expenses. And so I think, and then as you go like over to 50, then your owner's compensation would go down to 35, but your profit increases to 10. So you're kind of shifting salary to profit. But I think it's a really good guide. So we actually, as we said in the last episode, track this, and we keep the percentages of our expenses to our revenue, of our salaries to our revenue, so we can make sure that those stay into check.
And so I think this is a really, really interesting thing to look at in your business, regardless of where you're at.
Jeni (22:05)
Yeah, I totally agree. Yeah, I would say the most important thing is to start when you're first starting, you know, this is where we break from profit first, because we say the goal is to break even year one. I think once you have broken even and you've paid whatever your initial investment was and, you know, whatever your very, very baseline costs are for running your business, you need to pay yourself something. I think the very first year, I paid myself something like
$5,000 $7,000 the first year. And we had only started the business in the summer, so it was just part of a year. And to me, the fact that I could make anything from this thing I had just basically pulled out of nowhere, I worked really hard. But the fact that I made any money from that was astonishing to me. And so I think it's really important to pay yourself something, because even in year one,
Because that's what gives you the momentum to keep going. so it's not maybe on, know, it's like the snowball effect. don't know for those of you who follow financial blogs and financial books, there's this idea, like if you really are just like a robot and you're looking at what makes sense, like paying off debt, for example, it's better to pay off the highest interest debt first and then go from there, like in terms of credit cards or student loans or whatever, like go down the ladder from there. Like if you were just a robot without any other things going on,
Like that would make the most sense financially, but because we're human, there's this idea of a snowball effect where you should pay off the smallest debt first and then take the money that you were paying towards that and pay towards the next smallest and the next smallest. So that's not necessarily the highest interest rates, but you're paying off like loan after loan after loan as fast as you can, because that gives you the psychological momentum to keep going. So I think that applies also to business. Like you have to give yourself something. Otherwise you're gonna, you know, all of those
long days and sleepless nights, like those are gonna add up and you're gonna give up if you don't have something, you know, kind of like a trail of breadcrumbs, like leading you to what's possible.
Sandy (24:09)
Yeah, I agree. this 50%, I mean, that might not work, right? Like maybe it's 10 % as long as it is something just to reward your efforts. And maybe you choose to put 90 % back into paid ads or, you know, 80 % into a software system or a coaching program or something like that. That is totally your choice. Or maybe you are, you know, you've got a partner that you don't actually need your revenue. But even still, I would still say pay yourself, even if it's a couple hundred dollars a
Jeni (24:39)
So I think that's important.
Sandy (24:40)
You
to choose. I would just be aware of those percentages and just watch those and then increase it as you can and don't get into the trap of revenue minus expenses is, this is all I get this month because that's a really depressing, resentful place to operate a business from.
Jeni (24:56)
Yeah, and that's where almost everyone is for years and years. So the default is to not really know what you should do and for it to be haphazard. That's the defaults, think, in entrepreneurship because most of us don't come from a family of entrepreneurs. We weren't exposed to this in any way. Even if you go to business school, this isn't the kind of stuff you learn in business school, like actually running your own business, right? You learn how to go be an analyst for a big consulting firm. You don't know how to do this. And so it's OK. Start with where.
you are, but know that there's a real benefit to paying yourself. And there's a real benefit, as we've said throughout the series, in developing financial intelligence and understanding your numbers and understanding how you can manipulate those numbers and affect those numbers as an agent in your business and in your life moving forward.
Sandy (25:46)
Awesome, thanks Jeni.
Jeni (25:48)
All right, folks, we'll see you next week.
Sandy (25:50)
Bye.