“You won’t make any money in your first year”
This is in my opinion, the most dangerous thing you will be told about your business. The first thing we need to talk about – there are a few versions of this saying. Some say money, others say profit.
So, let’s break them down – If you make no money at all in your business – and I’m talking after you have launched not while your working on it – then something is seriously wrong. You need to cover expenses at least otherwise what even is the point!?
The other version – you won’t make a profit – let’s have a bit of a talk about that. Profit is your total income (also known as turnover) minus your expenses. That’s your profit. Now this is important, keep this in mind as we go along here.
First things first – You need to have a look at what your expenses were in your first year. Did you buy machinery, websites, signage – All these things will last you a lot longer than 1 year? So when you’re assessing your first year (for viability, not tax), you want to calculate those items at their usage for that year only. You have essentially invested in your business’s future.
So you have to take into consideration what exactly you spent the money on.
The other thing we need to talk about here – is you can pay yourself a wage AND not make a profit in your business.
Of course if you are a Sole Trader – your wage in the eyes of tax law isn’t an “expense” and therefore will be considered “profit”. But this is where this saying becomes so dangerous to new business owners.
You absolutely should make sure your business CAN pay you a wage. Of course, you cannot go into your first year expecting an $80k a year income for yourself. But when you are doing your financial calculations – they need to be made using your desired income. If your business cannot make enough to cover expenses AND your desired wage – then it’s not viable and you may as well give up before you start.
You absolutely should opt to take a smaller wage in the beginning, leaving more cash flow in the business to help it grow. I’m not saying take every dollar out for yourself. But if it’s not possible to every make your wages – what exactly is the point?
I talk to a lot of businesses that are in their first year. One of the first things I ask them is “are you drawing a wage, and is it enough?” if I had a dollar for every time I heard “no I’m not making a wage but you know, you don’t make money in your first year so it’s OK” – I’d have enough money to pay my own wage.
Just how much should you pay yourself? This depends on a multitude of your own personal circumstances.
Do you have a partner who is the sole income earner right now? Then you may just afford to opt to take no wage in the first year and re-invest your wage to help the business grow – But you need to make sure there is money actually coming in that could pay your wage.
Perhaps you have a full-time job now, and you can start this as a side hustle. You might be able to take a smaller wage from your business and drop to part-time in your employment if your lucky enough to be able to do that. But again – the other portion of your wage should still be earned, it’s just re-invested in the business.
If you have no choice, and no other income and your business HAS to make your wage. You need to calculate your minimum wage required (as well as your full desired wage) and do the sums and see if you can indeed pay yourself that minimal amount.
Your bootstrapping your business, so you should be bootstrapping your personal life.
The main point is – your business should absolutely be making enough money to pay your wage. And if you choose to re-invest that into your business – make sure you’re spending it wisely on items that WILL increase your profits. So here are my, no Bullshit tips for your first year of business:
Get comfortable with taking risks. Starting a business is always a risk. But it should be a calculated one. You should know exactly how much earning potential your business will have, and what your break-even point is.
Give yourself some credit. Celebrate the wins! No matter how small. Make yourself both short term and long term goals. It can be deflating taking home pennies if you don’t feel you’re achieving anything.
Make a commitment to yourself to pay your wage. When doing your financial calculations, include your desired and deserved wage in with your business expenses. You’re the most important part of your business.
Be flexible. You might want the cute boutique down that alleyway in beautiful Melbourne. But you may find an online storefront a cheaper alternative to get you started out.
Make time for family and friends. Yes, your first year means a ton of your time to DIY almost all of your business – unless of course you have a great capital injection behind you to pay the experts. But you are going to need your support system. Make time for your friends and family. Don’t take them for granted. But most importantly, make time for yourself. Your no good to your business once you hit burnout.
Know where your next meal is coming from. Don’t go into business without doing the sums first. You might have some savings to live off to start with. But you need to know at what point to call it quits if it’s not working out. Do not rely solely on your business to meet your basic needs in life.