Starting and growing a business from scratch is a dream for many people. But often, that dream turns into a nightmare. The financial rewards are not what they dreamed about, and the long hours were not expected to go on for as long as it has (years and years).
Well, if this sounds like your situation then you’re living the dream and buried alive.
Going from dreamer to dream-maker providing job opportunities, valuable products and services requires you to get from inspiration and energy to operational effectiveness and profitability. This is the transformation that many have very successfully mastered while others continue to struggle with.
Achieving work-life balance
Many business owners feel as if they are buried alive and they wonder when they will ever get to the point that they enjoy an improved work-life balance. Work-life balance typically comes once a business consistently achieves enough pre-tax earnings performance enabling them to be properly staffed throughout the organization with a focus on hiring and developing a highly effective management team.
The minimum earnings performance threshold that enables small business owners to start experiencing a more comfortable work-life balance is about $250,000 in pre-tax earnings. Once an organization achieves this earnings threshold, they typically have the financial means to expand its bandwidth, providing ownership with an opportunity to delegate more responsibilities.
Leveraging the team
Sustaining a minimum pre-tax earnings performance at or above $250,000 on an on-going basis is a key milestone for many small companies, providing the owners with the ability to delegate more responsibilities to qualified people enabling greater leverage, greater momentum and ultimately an improved work-life balance. Let me explain.
Regardless of what a company produces from a revenue and earnings perspective, businesses typically use their cash for the following items:
— Performance bonuses
— Corporate income tax
— Re-investment into the business (equipment, machinery, computers, software, etc.)
— Debt retirement
— Corporate savings
— Staff expansion
Every company’s numbers are different, but it is difficult for an owner to get a healthy work-life balance until their organization achieves and sustains a minimum pre-tax earnings performance of $250,000. With earnings less than that, most of the money has a place to go.
Let’s plug some realistic numbers into the above categories and see what we come up with. Once you’ve reviewed these numbers, think about your own business and determine what it has to produce in pre-tax earnings in order to achieve a free cash flow of $50,000.
Again, use the above categories as a guide and modify it as you see fit.
Free cash flow example
Assumes an approximate pre-tax earnings performance of $250,000.
Performance bonuses: $ 25,000
Corporate income tax: $ 80,000
Re-investment: $ 50,000
Debt retirement: $ 40,000
Corporate savings: $ 30,000
Staff expansion: $ 0
Free Cash Flow: $25,000
Of course, your numbers will be different, but for owners of small businesses that feel buried alive with no end in sight, it’s important to take the time to develop an understanding of the financial performance required to enable you to increase bandwidth, and ultimately improve your work-life balance. Once you have greater clarity regarding this number, then the race is on to make the business decisions that support the goal of restoring balance to your life.
Philip Mydlach is the owner of Mydlach Management Advisors, a corporate planning and performance improvement practice in Waukesha. He can be reached at (262) 662-4646 or pmydlach@aol.com.
August 19, 2005, Small Business Times, Milwaukee, WI
