Edmonton Business Coach | Don’t Increase Your Income with Revenue
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Make you think you’re richer than you are? Like kind of the opposite of that Scotia Bank stuff. You know, you’re richer than you think. Um, a lot of times it’s poorer than you think.
Yeah, I can see the whole why with the two. I can be [inaudible] because it’s not,
hi, thanks for joining us for another episode of ask Spergel CPA today is to business coach. We’re talking about how you can’t, you shouldn’t increase your income in line with revenue. Again, as the editor business coach, we’re saying don’t increase your income with revenue. Um, and I have Michael here with me again. Michael, have you ever worked with an Edmonton Business Coach before?
didn’t you organizations that had any cashflow constraints and they had issues with people actually did?
Yeah, you did. That was a tough situation, right? And then sometimes the business owner, they just don’t know. Uh, any better. You don’t. No one has taught them that, uh, you know, if you sell, you know, 1000 bucks and you can’t just take them in $1,000 over the company. So the pool that we have here today is a Warren Buffett quote. You know, all time, great investor. And he says accounting is the language of business. Accounting is the language of business. And the statistic that we have, you know, 50% of all Canadians, while businesses go out of business in the first five years and 29% of these failed business owners will, this running out of cash is one of the primary reasons for their Fay or making running out of cash. The second most common reason for business failure and the story that we hear over and over again are business owners start thinking that if they need another thousand dollars per month from their business, they can simply just sell another thousand dollars. So Michael, what questions should those business owners be asking before they take out that thousand dollars?
Are most business owners used to seeing the cashflow and a business account?
Most business owners are not used to it. They start seeing all this cash will come in and they’ve never seen deposits like that come into a bank account. You know, when they look and compare it to their personal account, um, you know, it’s, it seems like there’s a whole bunch of money coming in. Um, because that’s just the way your business operates because a lot of expenses going out to, be sure to work with these amazing Edmonton Business Coach here at Spurrell and Associates!
does the account activity often make him think they have money to spend?
Yeah, the are they start to, you know, we’re working in a job they never see, you know, deposits more than, you know, 5,000 bucks every payroll or something like that coming into their Edmonton Business Coach. And all of a sudden now they’re see no deposits totaling 10 20 a hundred thousand dollars a month into their business bank account. And it makes them think that they have more money to spend. But in reality they don’t have, they might not even have as much money to spend as they did when they were an employee because they’re not really truly considering the cost and the net income and how much of that is actually theirs to spend.
What are direct costs?
So the direct costs are the costs that are necessary to deliver the product and service. So they’re directly tied with that product and service. So I mean it, let’s say your a physician, you’re running a medical clinic, you know, the direct costs would normally be for every dollar that you build a patient or you bill Alberta health care. Um, you know, it would be the 70% that gets paid out to the contract physician. You know, it doesn’t, whenever you accrue that dollar, there’s definitely, you know, 70 cents going out. Or if your, uh, uh, doing construction, um, you know, for you, you build a client $1,000, but it costs you, it costs you $750 for the sub trades and the materials and after you pay those direct costs of doing that job, um, you know, the rest is the gross margin that’s a left over. So they’re different than your overhead costs, where your overhead costs, they tend to be, whether you do work or not, those overhead costs are relatively consistent.
Where those direct costs, they’ll vary directly with how much revenue or service you do. You do more revenue, the direct costs go up. And that’s not usually when your costs go up. That’s a bad thing. But if your direct costs go up because you doubled your revenue, that’s not a bad thing. That just means you did more work. Right. Whereas if you do less work, uh, those costs will come down. But only because you did less work. So you had less contractors, less supplies to buy. Do direct costs often get paid after revenue is collected. Yeah. So a lot of times you’re looking at those deposits coming in in the bank account and the revenue looks good. Um, but really those direct costs, they’re going to be paid after, you know, when they were bought on a credit card that’s going to be paid out after, or they came from a supplier that gave you net 30 or net 60 days terms like a Edmonton Business Coach.
So sometimes you’ll end up seeing the money come in, uh, you know, make you, uh, you know, the, it make you think you’re richer than you are. Like kind of the opposite of that Scotia Bank stuff. You know, you’re richer than you think. Um, a lot of times it’s poorer than you think when you’re looking at a business bank account because yeah, those deposits are big, but they expenses are going to be a equally as being, a lot of times those expenses, you know, they’ll come after the revenues collected. Why do you need to understand your gross margin? So the gross margin is basically what’s left over after you pay those direct costs. So starting to understand that gross margin in terms of a percentage. You know, if I sell an additional thousand dollars after I pay all the direct costs, I only have $250 left over. That can be, you know, really powerful. Um, because that lets you understand that, yeah, I saw these, you know, um, thousands or tens of thousands. It’s come into the account as deposits, but really at the end of the day, um, I only get to keep x percentage of those are, I only have, I don’t even get to keep that. I only have this leftover once I paid that direct costs. And then I have to, you know, look at my overhead too as well. Right? And tax implications. Can you, business
owners generally take money out of a business tax free?
Yeah. So not only do you have to be able to direct costs, if you want to take that money for personally use, you know, pay your personal mortgage, take a vacation, buy groceries, whatever you’re doing, that’s also going to, you know, accumulate some personal attacks. So there’s going to be some tax implications as, as well. Uh, and those tax rates, you know, in Alberta can be, you know, anywhere from on the corporate side, if we’re talking 11%, if you keep it in the corporation to as much as 48%, if you take it out of the corporation at the highest marginal rate in other places in Canada, it can be, you know, north of 50%, uh, the tax rate, depending on what province or territory that you’re in, right. Be sure to work with these guys here at Spurrell and Associates as soon as you can for their Edmonton Business Coach!
If there is a 50% tax creek, how much income is needed for $1,000 after tax.
Yeah. So if you, if you’re, if you had a 50% tax rate, which is terrible, and hopefully we can do better with good tax planning. Um, but let’s say if you do have a 50% tax rate, in order to get $1,000 out personally for your personal expenditures, we need to make $2,000. So if we make $2,000, we pay 50% of that is tax a thousand. We have a thousand left for our personal expenditure. So it wasn’t just as simple as selling another thousand dollars, you know, we needed at least two to overcome the tax.
If there is a 25% margin, how much revenue is needed for $2,000 in income?
Yeah. So we go back to that. Let’s say we want that thousand dollars. We have 50% in tax. So we need $2,000 to get ourselves $1,000 on our personal. And um, so if you need $2,000 in income, you know, and if you only have a 25% gross margin, you know, you need to take that 2000 and divide it by 0.25 or times it by four. You need to sell $8,000 to get that $1,000 out. So again, you start at eight, you get to keep 25% of the, you get to keep two, and then you pay 50% tax. You get to bring in one. Um, so it starts to put it into perspective. You know, you’re looking at these, say you had that $8,000 deposit in your bank, you don’t have $1,000. You have $1,000 that you can take out. So, uh, you know, that’s why you can’t increase your personal income in line with revenue. Uh, you know, you have to consider the gross margin and the tax rate that you’re going to have to deal with the top Edmonton Business Coach.
is this why business owners should think hard about personal expenses.
Yeah, they should think long and hard. Or you look at your personal budget and the difference between what you need to sell in your business. If your personal budget is $6,000 a month as opposed to $5,000 month can be really significant. Like in this, in this example, that means you have to bring in an extra $8,000 a month in revenue in order to meet that extra thousand dollars a month personally that you have. So whether that’s, you know, uh, that, you know, fancy, uh, car payment or truck payment that you’re, you’re thinking of. Yeah. If you want that extra truck payment, um, you know, once a nice fancy truck and it’s $1,000 a month and it’s not a business expense. If it was a personal expense, you might need to sell $8,000 a month or more depending on what your tax rate is, what your margins are. So you know that cash can be really critical for a business and they’ll, sales can be really difficult to achieve.
So you’ve got to take a long look, especially as a, uh, an early phase or a startup entrepreneur on, you know, is that really unnecessary expense? What are some ways that people should consider investing back into the business? Yeah. So, if we do have that, you know, revenue coming in, once we pay our gross margins, you know, we have to decide if it’s not, if these aren’t necessary personal expenditures, we want to say how can we invest back into the business. So investing back into the business, it’s generally a, a couple things that you’re going to do. You’re either going to buy equipment, so you’re going to buy equipment that’s going to make you more efficient and more profitable in the future or allow you to get more projects which are going to bring in more revenue, uh, or you’re going to invest in people.
And those people are gonna make you more efficient and allow you to do more projects in the business. Um, and a lot of people don’t see that as that. There’s a lot of people don’t see, uh, that personnel of the business as, you know, a, they see that as an expense when really you can view people in your businesses the same strategic initiative of adding, uh, equipment, um, because of written to provide that same benefit after a while. And then the other one is marketing. And a lot of people really missed the boat on that. So we, we’re talking about investing back in your business. Normally you’re investing back in your business by getting, uh, equipment, uh, or people that are gonna allow you to be more productive or marketing that’s gonna make the phone ring more often. Um, and those are investments back in the business. Be sure to work with some of the best Edmonton Business Coach by far!
Sometimes, you know, people say investments back in the business, they’re just investing back into a bad business model cause they’re losing money and the growth margin, they’re not really investing in, you know, new equipment and New People and more marketing, uh, you know, to really grow their business. We’ll investing in the business, make it easier to draw personal income in the future. Yeah. So, you know, you can really worry about, you know, selling that first 8,000 bucks so you can get your thousand dollars out if those are the numbers. Or you can think about, hey, uh, you know, I, I potentially have $2,000 that I can invest back into the business and marketing. So I’m not worried about do I have another $8,000 at $8,000 in revenue where I can think about how do I generate 20 or 30 or 40 or $50,000 more a month in revenue? That’s what’s going to make it easier, as is, you know, strategic investments back into the business that’ll pay back in, in perpetuity. So I think that’s what we have here today. Thanks so much for tuning in. As always, please hit the like and subscribe buttons. So we continued to deliver you tips on how to beat the odds at business and as always, please leave us some comments so we can respond back in and know, uh, what you guys like address in future videos. Thanks very much.