Revenue vs Net Income: What Most Coaches Won’t Tell You About Running Your Own Business
You probably have run into an ad like this:
“I made six figures running my own business, click here to learn how you can do the same!”
When I see this through the eyes of someone who runs a multi-million dollar business and regularly signs off on five-figure checks, I have to question whether that's revenue (most likely especially since it's an ad) or net income. It makes me roll my eyes, that's not much of a business, it's a guy working out of his garage, probably working all hours of the day stressed out making less than he did in his 8-5 job.
The reality is that only hitting low six figures in revenue as a business owner means that a lot of regular employees are making more than you are. It's why doctors often sell out their practice to hospitals, they want to practice medicine, and have realized that going on their own comes with a lot of headaches plus may not even pay better.
So why is that? Isn't $100,000 or $200,000 a lot of money?
Sure it is, and it's a good sign that you have the foundation for a scalable business if you can get that much revenue coming in. But let's take a typical example of a coach, we'll call him Fred.
“Fred” working out of his house
Fred is making good money at a company but wants the freedom he keeps reading about from all these coaches and bloggers out there who are making the independent lifestyle look amazing and decides to strike out on his own as a coach. At first, it's tough to get clients, but eventually, after he hires a coach himself and learns how to get leads, he starts signing up clients.
After many months of struggling, Fred finally breaks the six-figure mark but then realizes something. He is bringing home significantly LESS than what he made working at his regular job while working many more hours, especially after he got that massive tax bill and a penalty from the IRS for not paying quarterly estimated taxes and being properly registered to do business in his state (ouch, harsh lesson Fred, welcome to being a business owner). After a few years, he may even return to work, realizing it is less stress than owning his own business.
I hate to hear stories like that because people like Fred are making a massive difference in the world by helping people, and it is possible to live the traveling lifestyle as people like Ryan from Blogging from Paradise have proved, but it happens every day. Why would Fred close down shop if he's making six figures a year and loves helping others? That's pretty good, right?
The reason people like Fred close up shop is that there's a massive difference between revenue and net income, but they didn't fully understand that when creating a business plan. As an employee, Fred didn't see any of those hidden expenses like the cost of goods, sales & marketing costs, registration costs, legal fees, insurance, rent, utilities, equipment purchases, software fees, travel fees, depreciation, interest fees, or any other of the long laundry list of expenses that business owners incur. He didn't realize that to produce six figures in his pocket; he might need to create five or even ten times that amount in top-line revenue, so didn't plan out how he was going to do that. He also didn't realize that he might have to make a lot of adjustments to his lifestyle to afford to build his business and that creating a business from scratch is more than a full-time job in the beginning.
Had Fred stuck with it a few years longer and invested in learning more about how to run a real business rather than just creating a low paying high-stress job for himself, he probably would have been thrilled with the lifestyle he had created. Unfortunately, as Bill Gates said, “Most people overestimate what they can do in one year and underestimate what they can do in ten years.”
“Most people overestimate what they can do in one year and underestimate what they can do in ten years.” -Bill Gates
I can tell you how to make a ten million dollar business this year, guaranteed. Spend twenty million in ads, and sell two hundred dollars worth of stuff for a hundred dollars each. Voila, congrats, you can say you have a business with a revenue stream of ten million. You also have 100,000 customers to deal with, and you took a twenty million dollar loss buying all that stuff and paying for the advertising. That's not to mention the fact that you probably had to hire employees and they want raises because business is doing so good, after all, they are working hard filling orders and can see all the money flowing in, right?
My point is your top line revenue is essential, yes, but ultimately profit is king, and it's probably going to take a whole lot more cash coming in than you expect to cover your expenses so that you can hit your goals. Being a business owner can be incredibly rewarding, plus ultimately give you more freedom and income than any job, but if your aim is only to produce $100k in revenue and you haven't thought through if you can truly live on what the bottom line will be or how many hours you'll have to work to get to where you want using your current strategy, you probably need to rework your business plan a little.