Starting A New Business : Part 4 – Profit is not Salary

Treating profit as salary is a common error for new businesses.

It’s unusual for new owners to start by thinking their business through to the “end game” or to its ideal place.

While some plan with an exit strategy in mind, there’s more to business than “do something, grow fast, get bought by Google”.

What happens if you don’t get bought by Google, WalMart or whoever? You’re stuck with the business you designed. Or worse, the one you didn’t.

Design the ideal

It’s far more desirable and strategic to figure out what your ideal business should look like before you start than it is to randomly arrive in your business’ future and realize that it isn’t at all what you planned to build. Much less that it’s not what you really wanted to do.

Hopefully it’s obvious that it’ll be hard to redesign your business two, five or ten years down the road. While it can be done, it won’t be as easy or inexpensive as designing it upfront.

If you design the ideal business, you have a lot better chance of getting there faster (or at least more efficiently) because your decisions have a built-in filter: “Does this decision move us closer to our ideal or not?”

Yes, almost every business owner has turned away from their ideal temporarily because of a job, contract or customer that was low-hanging fruit: A deal they accepted because the revenue was enticing enough to pull them in the wrong direction and distract them from their ideal – even though they knew better.

You’ll be far less tempted by these things when that built-in filter is there from day one.

Working for, Working on

If you seriously ask yourself “What would my business look like, act like, do, sell, etc when it’s exactly how want it to be?”, you’ll find yourself thinking about important things that go way beyond that widget you just have to sell.

One of the really important questions that should come out of that is “When my business is in its ideal state, how much time do I personally want to work there, either as an employee or owner?” The difference is simple: most employees work for a business, but owners should work mostly on their business.

Few think about that when doing budget projections at startup. What often ends up happening is that you create a job for yourself because your business can’t survive without you.

If you started this business to get away from a job, replace the income from a job that you’ve lost or to earn your freedom – do you really want to design and take on another one?

Job or business?

It’s a job if it’d fall apart, fail to generate revenue and/or tick off customers because you stepped away for an afternoon, day, week or month.

A business shouldn’t need you working every minute of every work day to generate revenue. That’s what brings us back to talking about your business model and why I insisted that profit is not salary.

Profit is what an owner/investor receives. Salary is what an employee receives. Today that might seem like a meaningless difference.

As your business grows, you’ll reach a point where you have to hire someone because you can’t get it all done. That may seem like a fantasy today, but if you do enough things right – it could end up more like a nightmare. Planning now is what makes the difference.

Be an investor

If both profit and salary are built into your business model, you’ll be prepared to hire someone to take on the work you can’t get done or no longer want to do.

While you’ll have to give up your “worker salary” when that happens, the “management” salary should still be there. When you delegate the work to someone else, you don’t want your business to be designed (much less required) to stop paying you – and that includes the day you decide to hire a manager to replace you.

Look at it from a buyer’s perspective. They want to invest in a profit producing business, not a job.

To that end, YOU are the first investor in that business. Design with that in mind.

2 thoughts on “Starting A New Business : Part 4 – Profit is not Salary”

  1. Okay, now you have my attention. I have been reading/following this thread. Despite having been in business for almost 22 years, I saw that the points you made were always right on but – to be direct – a little boring. I mean, sure, they make sense, but it isn’t like I went screaming from the room, “The new phone books are here! The new phone books are here!”

    But this one hit me nicely, right between the eyes, especially the “Design the Ideal” part. After 22 years, I still haven’t done that. But rest assured that I will. Today.

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