There is a common myth about entrepreneurs.
The myth goes like this: Entrepreneurs are really rich.
This is patently false. Entrepreneurs, as a class of people, cannot be described as financially successful. Of course some are ridiculously wealthy, but most are not.
Some entrepreneurs do what they do for the money, but most do it because of an unquenchable desire to create something that matters, and that something isn't always lucrative.
What about the money, though? It does matter.
As long as you play your cards well, you'll succeed. Scholarly research on the subject of financial returns for entrepreneurs vs. employees states that entrepreneurs can and do make more money than the average employee.
To avoid financial ruin, entrepreneurs should understand how they can control their income. To "control" income does not mean that you will remain at a fixed income, nor does it mean that you'll never go under.
Controlling income means that you are developing financial systems and implementing best practices in order to bring stability to your earning, spending, saving, and personal net worth.
Here are the steps that I recommend to entrepreneurs who are willing to embrace the risk and enjoy the rewards of self-determination.
Set clear goals.
Whether you believe in the power of visualization or not, you should be setting clear financial goals for yourself. In other words, determine how much money you want to make.
- Your annual income. Decide on the amount of money you want make each year. Keep your goals high, but be realistic. A goal of .5 million in annual income is probably very high for a nascent entrepreneur--unless you have already created a substantial income stream or own a business with lucrative acquisition offers on the table.
- Your net worth. Annual income is only one component of your financial life. Another area to consider is your overall net worth. Your net worth should be increasing year over year, as you mature, gain experience, and grow your business(es).
- Create a moving target. Your income goals should move upward. The higher you set your goals, the harder you will work to achieve them and the more external pressure there will be to succeed.
The path to true income control is knowing what you want, and knowing how to achieve it.
Break your big goals into monthly chunks and actionable steps.
Creating goals is the easy part. Pursuing them is the challenge.
I find it helpful to break down my annual income goals into a smaller, monthly amount. Simply take your annual goal and divide by 12. That number is how much money should come in each month.
Now, what are you going to do this month to earn that amount of money?
You have a goal. Now you need a plan for achieving that goal. It may look something like this:
- 52 signed contracts
- 10 new customers
- 300 units sold
- 12 sessions booked
Create automatic systems.
Here's the secret sauce for boosting your business and controlling your revenue: systems.
You can't control your income unless you have some method for automating your business. By "automating," I'm not referring necessarily to passive investments such as dividend-paying stocks or rental income. Instead, I'm referring to the systems that you develop that make your business go. I define a system as "a method of solving a repeated business issue in a strategic and effortless way."
Take, for example, a consulting business. Instead of reinventing the entire process of marketing, finding prospects, cultivating leads, onboarding a new client, asking questions, and devising a solution, create a system that addresses all the components.
For the consultant, a system may look like a combination of lead generation tactics, remarketing strategies, a personal assistant making screening calls, an automated questionnaire, and a pre-written set of solutions or sessions.
Your system makes you money and saves you time. No longer are you tied solely to an exchange of hours for dollars. Rather, you are leveraging systems to earn money for you.
The larger and more solution-oriented those systems, the more you will be able to earn, and faster.
Automate your business.
Automating your business is slightly different from creating systems.
A system is a small-scale maneuver that saves you time and earns you money. Automation is a large-scale move that liberates you from the business process, places it under the oversight of someone or something else, and allows you to control your income with greater liberty.
Let me give you an example. Let's say you have a consulting business. To automate it, you hire several support staff members and a lead consultant. No longer are you doing all the work of consulting; you now have a team of people who are doing the work.
You may still oversee administrative aspects of the business, respond to questions with top clients, and give your input, but you aren't working in the day-to-day of the business. You're an entrepreneur--a creator of businesses.
What this does is allows you the liberty to start a new business. Your existing business continues to make you money, but you are expanding your control with new business initiatives.
Pay yourself less. Invest in the business more.
One of the most important features of an entrepreneur's life is how much he or she pays himself or herself.
The lower you set this number, the greater your ability to grow your business. If your revenue is $100,000 each year, and you pay yourself $75,000, that leaves a paltry $25,000 to grow the income. If you were able to reduce your living expenses to $50,000, then you would have $50,000 to spend on the business.
Assuming market conditions are correct, the more strategically you spend on your business, the greater it will grow.
By capping your own income, you are taking control of your finances as a whole. In the long run, investing more in your business will net you more money, both in terms of net worth and annual income.
Don't act on over-valuation
Much of the tech world is suffering from a bloat of over-valuation. Over-valuation happens when the market price of a stock is too high based on its prospective earnings.
Silicon Valley over-valuation happens when starry-eyed investors assign a startup an astronomical price. Unicorns are the result of an egregious trend of over-valuation, and many investors fear that we are witnessing a second tech bubble because of it.
Whatever the state of the market as a whole, you can't gain control if you depend on out-of-whack business valuations to determine your spending, your net worth calculations, or your future financial decision-making.
Business valuation is but one number in the world of entrepreneurial finance, and it is the one that has the least basis in reality.
By all means, you should know the value of your company, but you should not use this metric as justification to buy a Ferrari or a beach home. As the idiom goes, don't count your chickens before they hatch.
Develop multiple sources of income.
The best method for grasping a firm control of your entrepreneurial income is to diversify your income streams.
There is a widely repeated saying that millionaires have seven income streams. In other words, millionaires have to be entrepreneurs. There are few other ways to develop such a diversity of income streams without somehow building an additional business or two.
List as many money-making opportunities as you can, sequentially launch each one, automate processes, and then outsource the management. In this way, you can develop a multitude of income streams.
The result of this approach is massive financial control. You get to decide how much money you make, and how fast you make it.
Nearly everyone wants financial control, but few people have a sufficient understanding of what it is and how to achieve it.
The path to the greatest amount of financial control and growth is the path of informed entrepreneurism. It is not easy, but it is rewarding.
What ways have you tried to gain financial control as an entrepreneur?