Marketing may get all the attention these days, but there is immense power in some hidden numbers that lay buried in your business. They can define what is possible in your practice. They can tell you if it's time to raise rates or redesign your business altogether.
Let's walk through a few of them.
Imagine that you run a coaching business. You charge an hourly rate of $150. And your goal is to take home a modest $100,000 per year. How do you break that down to set your weekly and monthly goals?
How many client deals is that? How many billable hours is that? Is it even possible? You can get answers by fleshing out some hidden numbers.
Let's start with your goal: to take home $100,000. We will call this your Target Income (TI). Your TI is $100,000 for the year. But, to take home $100,000 you have to make more than $100,000. Why? You have to factor in your annual overhead, or all your costs for the year.
A simple formula to understand this is as follows:
(Gross Revenue - Annual Overhead) = Net Revenue Before Taxes
Your Net Revenue Before Taxes (NRBT) is not the same as your Target Income. This number looks big and sexy, but it leaves out the big chunk of change that many business gurus leave out. You'll have to pay to Uncle Sam his share.
Remember, you're designing your lifestyle not just a business. There's a huge difference between what you earn and what you get to keep. If you don't factor for taxes, your numbers will likely be off by more than a third.
What exactly is a realistic and reasonable tax rate?
Well, 35 percent is a reasonable starting point give or take. This would mean that your Target Income really becomes 65 percent of your Net Revenue Before Taxes.
So, if you want to actually take home $100,000, assuming you had no expenses whatsoever, you would have to earn $153,846.15.
Here's the real formula you should remember:
(Gross Revenue - Annual Overhead) = 65 Percent of your Target Income
Once you know your Target Income, you can work the numbers to figure out how many deals you'll need to hit that goal.
The trick is to know what the average value of your transactions or deals are. From there, you simply divide your Target Income $153,846.15 (making it rain), by your average deal size. Let's say it's $5,000.
Here's the math on this:
153, 846.15 / 5,000 = 30.76923
So, it would take roughly 31 deals per year to take home $100,000.
Real estate agents know these kinds of numbers very well. So do designers and wedding photographers.
You may be thinking, that this is all fine and dandy, but what if you charge by the hour?
Assuming you charge $150 per hour, to reach your Target Income, simply divide your goal by the hourly rate. In this example, you'd need 1,025.641 billable hours, spent across about 31 clients (or deals).
This can be broken down further into clients, deals and billable hours needed per month or week. But, there's one more important question that most entrepreneurs fail to answer. And here's where getting a little deeper in the numbers will change your practice forever.
Is it even possible under your current structure to hit your goal?
To calculate this we need to know how many billable work days you have, and how many billable hours are available each of those days. Don't worry. I did the math for you.
There are about 261 work days in a given year on average. And not every work day consists of only billable hours. There are also administrative and marketing activities, holidays, sick days, vacation and so on. These knock those available work days down, closer to 140.
Further, on any given workday you need to eat, take breaks, and check email. So 6 hours of billable time is more realistic for a full day.
So, are there enough work days in a given year and enough billable hours for us to walk home with $100,000?
140 billable work days at six hours a day gives us 840 billable hours. As we calculated earlier to meet our goal we need to clock in about 1026 billable hours to achieve our goal.
So unfortunately, $100,000 is out of our reach. Sure, you can choose to never take a vacation, holiday or get sick--but doing that isn't sustainable over the long haul.
This is the power of the hidden numbers buried in the business math. You're probably considering raising your prices now--and the subtle tweaks to this hidden math are what help you make or break your goals.