This week I’m talking about the “6-figure income”. I see a lot of people who want to show me how to make 6-figures in my business. But, I’m questioning the math this week. Yesterday, I showed you what 6-figures looks like when you make $100,000 in sales. (Go back and read the post to see why this is a WRONG way to calculate your income.) Today, we are working on Example 2 with our sample business. We will examine how to earn the $100,000 as our NET income (bottom line).
The assumptions that we laid out yesterday for this sample wedding planning firm include:
- Has been in business for about 3-4 years
- Is in a mid-sized metropolitan area
- The business has 3 packages that are priced at $2000, $4000, and $6000 ($4000 being the package that is sold most often)
- Does not have permanent staff members but has 2 event assistants as contractors (These event assistants are paid $150/event and are generally both in attendance at each partial or full planning client’s event)
- The business has $2500 in monthly expenses (which comes out to about $30,000 annually)
- The business is an LLP which means that the owner draws their own personal income from earnings (in layman’s terms: the owner takes a “draw” not a “salary” and typically this is taken after expenses are paid, from an accounting standpoint)
Let’s take a look at what 6 figures looks like if you have it as your BOTTOM LINE, your net income. This is the actual income that you get to draw as an LLP (or sole proprietor) – but still have to pay your 1040 taxes on. What do you have to do as a business owner to achieve that for your bottom line?
I’m going to back into these numbers, because this is all I know so far:
Income $ ? (this is what you actually do in sales)
Costs of Services Rendered – ? (cost of labor: 2 assistants at $150/each for 25 events)
Profit Margin ?
Expenses – $30,000 (we know this from our above assumption)
Net Income $100,000 (BOTTOM LINE) (this is what we are trying to hit)
NOTE: I apologize in advance for the algebraic equation… but stick with me! (If you want the easy-peasy spreadsheet for this where it auto-calculates using your pricing and costs, check out our sales plan download.)
Since all we know is this: Profit Margin – Expenses = Net Income
THEN… Profit Margin – $30,000 = $100,000
Means that Profit Margin must = $130,000*
OK… let’s figure out that top piece (income and costs). We can figure these out by examining our average sale and average cost of services rendered (or, cost of labor) for 1 singular wedding by doing this…
The average package sold is $4000 and we know that 2 assistants attend this event for $300. So for each singular wedding (on average) there is a profit margin of:
Income from 1 wedding: $4000
Cost of Services from 1 wedding: – $300
Profit Margin from 1 wedding: $3700
YAY! We know the profit margin from one wedding! So, now we can use that to figure out how many weddings we need to do to achieve the $130,000* annual profit (from Step 1). (If it helps, here is a ratio: If $3700 is the profit margin for 1 wedding, then $130,000 is the profit margin to ??? weddings?)
How many weddings does this business need to do to make that $130,000* annual profit?
$130,000 annual profit / $3700 profit from one wedding = 35.1 weddings! (let’s round up to 36)
36 weddings x $4000 price = $144,000 in sales (income)
And, on 36 weddings, you’ll have the 2 assistants at $150 each which calculates to: 36 weddings x 2 assistants x $150 = $10,800
What 6 figures looks like:
If I’ve totally lost you… this is what the math looks like after all the calculating:
Costs of Services Rendered – $10,800 (cost of labor: 2 assistants at $150/each for 36 events)
Profit Margin $133,200** (see note)
Expenses – $30,000
Net Income $103,200 (BOTTOM LINE)
(**Note: $133,200 is the profit margin for 36 events. The amount we were trying to back into was $130,000* which is for 35.1 events. We are rounding up so the number results in the $133,200 amount for profit margin.)
You hit the 6 figures! Wooohooo! Your Net Income, $103,200 (bottom line) is what you get to take home after all is said and done. THIS is what you actually draw as the owner of an LLP (or a sole proprietor) before paying taxes. THIS is a 6 figure income!!! YOWZA! You did it!
But – wait – 36 weddings. Is that realistic? Is that normal? Oh – I know it’s possible. I’ve seen it done. But – REALLY – it’s kinda insane! It’s especially insane with only 2 weekend assistants who are contracted only for events.
Like I said: making 6 figures takes REAL HARD WORK! It disappoints me that I never see this math done for people when $ is being discussed with small business owners. There is no quick way around this. If you want to make 6 figures, you better WORK super hard!
We all know that business ownership is hard work. But, if you want it to be a little less hard (LESS insane) you’ll have to adjust these numbers in order to reach the 6-figures. Increase your price, cut your costs, and cut your expenses. OR… explore additional revenue streams. 36 weddings may just put you in the grave.
If you are looking for ways to improve your finances, check out our Accounting 101 course here.