how much should a business owner aim to earn from their own business?
(I am really fortunate and lucky to have many well-wishers, one of them is Carol Tan. She holds the Guinness world record for the largest collection of Cow-related items. Dr Carol Tan is a Program Manager of Master of Fashion Entrepreneurship at RMIT University where I teach the subject of business finance management.
A few days back she sent me a video on WhatsApp and asked me to show it to my mother. It was about making vegan leather from mangoes. I found it really interesting. Here’s the link in case you are curious: https://www.youtube.com/watch?v=rcieZYwyEiA)
Me: Ma, did you see the video I had forwarded on WhatsApp?
Mother: no, it did not play for some reason. I think I need a new mobile.
Me: No, you need to delete unwanted photos and videos from your mobile as the memory is full.
(My mother deleted a few and saw the video)
Mother: Chinmay, this is really cool, making leather from mangoes. We should do it. What do you say?
Me: Just because it is a cool idea does not mean it will be a viable business. I would prefer to do more research.
Mother: then do it.
Me: Ma, I am not trying to show-off but I have too many things on my plate. I am consciously protecting my YES’s with lots of NO’s before making any commitments.
Mother: You just help me with the back-end stuff, I will take care of the rest.
Me: hmm… allow me to continue the conversation as a consultant and let us say you are my client.
Mother: ok, let’s start
Me: Have you made the payment?
Mother: what payment?
Me: (with a cheeky smile) towards this consulting session?
Mother: sell the remaining few mango pulp bottles and you can keep the change!
Me: (in my mind – if only you were given an opportunity to flourish as an entrepreneur I cannot even imagine the kind of success you would have achieved)
Mother: are you going to say something?
Me: yes, if you are going to start a new business how much money would you like to earn from it? Please remember, you are not your business, and sales do not mean business has made a profit, and definitely it does not belong to you.
Mother: I would like to make lots of money even though I do not need much but I can always donate and also support your father’s NGO.
Me: ‘a lot of money’ is not measurable.
Mother: Ok, you tell me Mr Financial Educator, how much money would you like to make?
Me: my rule of thumb – earn at least five times (5X) my market value as an employee.
Mother: What is your market value?
Me: for easy understanding let us say my market value as an employee is Rs 10,00,000 per year (10 lakh or 1 million). This means I would aim to make at least Rs 50,00,000 (50 lakh or 5 million) from my business in a year.
Mother: you be taking it in the form of salary as an employee or in form of dividends as a business owner?
Me: good question, it will be both
Mother: if you take so much money from your business then how will it survive?
Me: Ma, I understand this may neither sound practical nor it might happen during the first few years of starting the business. That is why I am saying one should ‘aim’ for it. In other words, this ‘aim’ is nothing but a belief. One thing we know about belief is we perform to our belief or underperform to our belief, very rarely do we outperform our belief.
For example, if I say, “I will get up at 5 AM tomorrow”, then I might get up at 5 AM or after 5 AM, however, the chances of me getting up before 5 AM is very less.
Mother: agree
Me: similarly, if I say, “I will earn Rs 50,00,000”, then I might earn it or might fall short but very rarely I might surpass my own expectation. One of my mentors used to say, “A business owner surpassing his/her expectation in business should be considered as success!”
Mother: ok but why 5X?
Me: As an employee, if I am getting paid Rs 10,00,000 per year (take-home salary), I am expected to work Monday to Friday from 9 a.m. to 5 p.m. (approximately 35-40 hours a week). Now, during the lockdown, it might be more as many are working from home.
Mother: yes
Me: In return, apart from my salary, I will also get a contribution towards my employee fund (superannuation, provident fund). I get holidays during the festival session, new year’s day, and other public holidays. Sometimes, on top of all this, I may also get a bonus, an allowance, and other perks.
Mother: yes
Me: now, as a business owner, how many days do we work?
Definitely not Monday to Friday. In fact, it will be from Monday to Monday.
And it is not 9 am to 5 pm. It is usually, 7 am to 11 pm
Not to mention, we as business owners also work during the holidays, sacrifice our family time, and neglect our health. We are prone to regular headaches and occasional heart attacks. Don’t you think we deserve more than our market value?
Mother: definitely!
Me: now, let me tell you my reason why should a business owner aim to earn 5X their market value?
In the first year, if I continued as an employee, then I would have taken home Rs 10,00,000.
Mother: yes
Me: Let’s say, I decided to take the risk of starting a business. We know that many businesses/startups do not succeed. Research says 60% of businesses fail in the first year and the remaining 40% close down in the next 3-5 years. That means I am entering a field where the chances of survival are less than 40% in the first year.
Let us assume that I managed to survive the first year in business. Not sure if the business would have made any profit, but let us say I took home Rs 200,000 in the first year. But I had the option to take home Rs 10,00,000 annual salary if I continued to work as an employee, not to mention the holidays, allowances, and perks. That means I am – Rs 800,000 (negative 8 lakhs or 800K).
In the second year, let us assume I took home Rs 400,000 from the business where I could still have taken home Rs 10,00,000 annual salary as an employee. That is -Rs 600,000 (negative 6lakhs or 600K) for the second year.
In the third year, let us assume I took home Rs 600,000 from the business. If my annual salary remained Rs 10,00,000, then it is – Rs 400,000 (negative 4 lakhs or 400K) for the third year.
In the fourth year, let us assume I managed to take home Rs 800,000 from my business, still I am -Rs 200,000 (negative 2 lakhs or 200K) for that year, assuming my annual salary remained Rs 10,00,000
Research says it usually takes 5-7 years to build a million-dollar business. In some industries, like software, it might be less, and in traditional brick and mortar industries it might be more. Anyway, the point I would like to make here is, in the fifth year, if I had chosen to work as an employee, my market value could have gone up to Rs 15 lakhs or Rs 20 lakhs. But the potential to earn in business after five years could be Rs 10 lakhs, 20 lakhs, 50 lakhs, 1 Cr or 100 Cr. There is no limit!
This is the reward we as business owners should aim for, for taking that leap of faith when we started the business, by putting down our papers, and moving out of the good-paying cushioning job.
A wise man once said, “People don’t get what they want simply because they do not know what they want.”
Similarly, as business owners, if we do not believe and aim for 5X our market value as an employee, then I am afraid I have to say that we will be
busy working hard to pay the rent to the landlord,
busy working hard to pay salaries to employees,
busy working hard to pay all the utility bills,
busy working hard to pay dues to our suppliers,
busy working hard to repay the bank loans.
And at the end of the day, we as business owners will be going home with an empty pocket.
Mother: I need some time to think about this.
Me: I am not trying to be a pessimist or demotivate you from starting a business, all I am concerned is about ROE. It is not only about Return on Equity but also about Return on Effort.
As you know, money in this world is unlimited but our time is limited!
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If you are a business owner, I would like you to ask yourself – have you surpassed your own expectation with regards to what you are earning from your business? or have we become philosophers when it comes to earning money?
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