While this might seem a little off the beaten path in terms of accounting, finance, and taxes, I find this to be an incredibly valuable concept to understand. Profit is relative. To understand what I mean by this, here’s an example.
If a shop has $500,000 in profit from $1million in sales, that’s incredible. The opposite end of the spectrum would be $500,000 in profit from a $1billion sales year, whch is much less profitable.
If you made $500,000 in profit from working 60-70 hours per week, that’s a great profit, but you’re killing yourself. If you can make $500,000 in profit from a self-sufficient shop, THAT’S a great business and a great profit.
See where I’m going here? If your business relies heavily on the owner, you have a very high paying job, which is great. However, if you’re trying to be a business owner who doesn’t have to work in their business as an employee, you might be falling short of your goal.
“Poor people by things, rich people buy time.” What does this mean? Let’s say you’re making $15/hour and you hate cleaning your house. If you need to pay someone $50/hour to clean the house, it’s not really a profitable decision to hire someone. It’s worth more of your time to cut your hours back and clean your house yourself. If you’re making $1000/hour, paying someone to clean your house is more profitable because you can use the hours that you have a house cleaner to go make another $1000/hour.
So, the first thing to do is understand what you are making. If you don’t know where you are starting, it’s difficult to know where to go, right? Step one is to take the amount you make in a year and divide it into the number of hours you work to achieve that number. Here are a few steps.
- Find out how much salary you make in a year: what do you take out in payroll? Look at the gross wages you are paying yourself. If your spouse works in your business, it’s a good idea to include that as a combined family hourly rate. This eliminates some variables and makes this calculation simpler.
- Find out what benefits you’re getting out of the company. Health insurance, retirement matches, and any other expenses that provide personal benefit to you (gas, food, travel, etc.…) are included.
- Add in net income. DON’T include depreciation!
- Figure out how much you work. If you don’t have a time clock, estimate the number of hours. The prototypical full-time hours in a year is about 2,000 hours. This includes a couple weeks of sick and vacation leave. If you can, it’s a good idea to start clocking this number so you can track and analyze trends more accurately.
In my estimation, a very successful business can operate without integral involvement of the owner daily. It isn’t realistic to work 0 hours in your business, but to be able to make the same profit as someone working 60-80 hours on a few hours a week or a month can free up time to work on your business, be involved with the community, hang out with your family, travel, vacation, etc…
So, now that you know your hourly rate, how do you improve it? One way is to make more money! If your hourly input is the same, you may as well increase your numerator and therefore increase profit. The downside is that you will be working harder, but not necessarily smarter. It is usually easier to cut a business owners’ time in business in half than it is to double your profit.
Cutting down your working time in business may be very doable right now if you can utilize the people, procedures, and tools you already have in place in your business. While it is often difficult to hand over control, it can be very worthwhile.
One thing to consider is that not all hours are created equal. Focusing on the most profitable uses of your time can make a large dent in your working hours. If you’re setting goals, looking at your numbers and having meetings with your team, this is a far more valuable use of your time than working on housekeeping and admin tasks.
For example, if your shop needs a shuttle driver and it will cost you $20-$22/hour, it may still be more worth it to hire this driver than to have yourself, as an owner do it. The most you will ever make as a driver is around $22/hour. If you hired someone and decided to go market your shop and picked up fleet client, you’ve just made much more than $22/hour for your business. If you hire a service advisor for $60/hour instead of picking up the slack in your shop yourself and this frees your time up to pick up additional business (like a fleet account), then you’ve made a great decision profitability-wise. Your earning potential for yourself and your business is far greater if you put the proper value on your time as a business owner.
Rob Nixon, of www.robnixon.com came up with what’s called the “Profit-Time Index.” This is like calculating hourly rate, but with a twist. It references “IN” time versus “ON” time. As a business owner you should be working “on” your business, not “in” your business. “In” time is being in the business doing things like answering phone calls, turning wrenches, shuttling customers. “ON” time are high level profitability activities like training your team, setting sales targets, monitoring your numbers, etc… If you’re spending 40 hours/week and you made $40, for example, you made about $1/hour. If you go on vacation but you have the tools in place for your business to run without you, you’ve made that same $40 without spending the physical time working in your business.
The main thing I hope you take away from this is that your time is incredibly valuable. If you talk to anyone of an older generation, or if you are part of it, it is likely that the answer to the question of what you most want is time before money. Putting a high value on your time is so important to improve aspects of your life so you can invest in the things that matter most to you.
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