Here’s What a Six-Figure Business Actually Looks Like…
There is a lot of hype online these days about creating a six-figure business. It seems like every search you do, article you come across or Facebook ad that you see is touting the “6-figure business”.
Wow! Wouldn’t that be awesome to take $6 and turn it into a six-figure business? I didn’t know that it only took $6 to do this. If I would have known that, I could have built my first six-figure business when I was 5 and received my allowance…
In addition to the above example, it seems like everyone is promoting some system or strategy for getting to “six-figures”.
“30 Days to a $100K Business”
“How I Made $200K With a Single Coaching Funnel”
Any the list goes on…
You see these ads all over the internet, especially on Facebook or Google if any of your online activity revolves around entrepreneurship. You see, this is how it works:
- You do a search for an entrepreneurial related topic, list it in your profiles or like the page of an entrepreneur, marketer or business owner that you like.
- Marketers can then target you with their advertising. They can run ads to people who do specific searches or like and visit specific Facebook and website pages.
- These marketers then hire excellent copywriters who sell you on how their course or training will help you create a “six-figure” business.
It all sounds sexy, but there are several ways that this can be deceiving (whether intentional or not). This post is going to walk through what a “six-figure business” actually looks like, along with some of the common misconceptions that get people into trouble when they set off to create this type of a business.
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6 Common Struggles That People Run Into
Before going forward, let me make one thing clear; creating a six (or seven or eight) figure business is not a bad thing. In fact, we currently run 2 six-figure businesses and have a third at five-figures (going to six next year).
The challenge comes in when false, misleading or deceptive phrasing or tactics are used to lure people in to purchase a course or coaching to help them build their business. Often times new (or sometimes even experienced) entrepreneurs fall into this trap and it ends up costing them thousands or tens of thousands of dollars and being disappointed with the results. Below are some of the common problems that people run into when they hear these claims/ads and go after the mighty “six-figure” business.
Below are some of the common problems that people run into when they hear these claims/ads and go after the mighty “six-figure” business.
- Directly comparing your paycheck from an employer with your income from the business
- Confusing revenue with profit
- Confusing revenue with cash flow
- Not realizing what it takes to build a business of that magnitude (long hours, investment, sacrifices, etc.)
- Feeling like a failure if you haven’t hit “six or seven figures”
- Not selecting the right course, trainer or coach to assist them
- Creating a six-figure business but not being happy
Now before we dive in, I just want to take a moment and share with you the why behind creating this post. There are several reasons;
- I want you to go into business with your eyes wide open. I want you to understand what things might look like for you if you have a six-figure business.
- There is often ambiguity/misunderstanding around revenue and profit. Especially if you are used to getting a paycheck as an employee, this could be a shocking lesson for you and lead to financial struggles.
- I want to understand what a “six-figure” business looks like before investing money into a course/coach to help you build this business.
Here is just one of many examples that can happen when someone doesn’t understand this before spending money.
Challenge #1: Directly Comparing Your Paycheck to Income From Your Business
When you receive a paycheck, the money that you actually get in your bank account is called your “Net Pay”. This is the amount that you actually bring home and can spend.
This is not to be confused with your “Gross Earnings”, which is what you make before taxes and other deductions are taken.
As an employee, you are likely used to see your net pay number ($2,144 in this case). You often don’t see and may even forget what your gross earnings are because the number that you always see is the actual money in your bank account. This is especially true if you get your paycheck direct deposited.
Now as an entrepreneur, things are a little bit different…
Let’s say you make a sale for $2,144. That money now comes into your business bank account (you do have a separate bank account for your business, correct?) You look at that and think that you have $2,144 to spend, but you really don’t.
Out of that $2,144, you now have to take all of those deductions that you employer previously took. That means you have to reduce that number by taking out
-federal and state taxes
-self-employment tax (social security and medicare, aka. FICA when you are an employee)
-your own insurance (which is likely higher than when you were employed)
By the way, that self-employment tax is ~15% (double what you pay when you are an employee because your employer kicks in half of it). Oh, and one more thing, you also have to take out expenses to run your business.
As the entrepreneur, you get what is left over, which is a lot less than the $2,144.
A common problem is that new (and sometimes not new) entrepreneurs don’t realize this and will spend the entire $2,144, which then doesn’t leave them enough money to cover the items mentioned above.
Using the numbers above, you as the entrepreneur are only left with $626. If you go and spend the entire $2,144, that leaves you in the hole $1,518. This is one way that new entrepreneurs get themselves into trouble real quick.
Now, you may argue that I’m not comparing apples to apples above because I used $3,500 for the paycheck and only $2,144 for the business income. Or you may say that those numbers are not accurate. And you would be right.
The point of the above examples was to highlight that the money that comes into your bank account as an employee and as an entrepreneur is different and can’t be treated the same. Your situation will obviously have some variations from the above.
Even if the initial income number started out the same ($3,500 in both cases), you would end up with less as an entrepreneur because your FICA tax is higher (~15% compared to ~7.5% as an employee), your insurance in likely higher and you have to remove expenses from that amount. So even with the full $3,500 in income, you may only be left with $1,000 after all is said and done.
Challenge #2: Confusing Revenue With Profit
Similar to and building on the last point, the next struggle with a six-figure business is not differentiating whether that six-figures is revenue or profit, and there is a big difference between the two.
In the most basic sense, here is how businesses work:
- The business has a product or service that it sells. This causes the business to make money (revenue or “top-line”).
- The business has to pay various expenses in order to create and sell their products. These are the business expenses.
- When you subtract the expenses from the revenue, what is left over is the profit (or loss) “bottom-line” for the business.
This is the basic formula for one of the 3 main business financial statements (called a profit and loss sheet or an income statement). The basic structure is
Revenue – Expenses = Profit
Prefer to Listen? We’ve recorded an entire podcast episode explaining how to understand your business financial statements.
So let’s take a few basic examples.
If someone has a six-figure revenue business (assuming $100,000), that means that their total sales for the business are $100,000. From these sales, the business has to subtract expenses (and taxes) to get their profit.
$100,000 (revenue) – $60,000 (expenses) = $40,000 (profit)
Suddenly this six-figure business isn’t nearly as appealing as it only ends up with $40,000 in profit.
But let’s go a little deeper.
The real formula for businesses to determine profit is a little more complicated.
Revenue – Cost of Good Sold – Expenses = Operating Profit
Cost of Good Sold (CoGS) is the cost directly related to making/purchasing the products or services that a business sells. So if it cost $20,000 to create/purchase the products that the business sells, this further reduces the profit.
$100,000 (revenue) – $20,000 (cost of good sold) – $60,000 (expenses) = $20,000 (operating profit)
Geez, $100,000 is not really looking like much. We are down to $20,000…
But it gets worse. The business also has to pay taxes on these profits.
Revenue – Cost of Good Sold – Expenses – Taxes = Net Profit
Taxes are required to be paid on the operating profit of the business. These taxes include federal and state tax. Obviously, this number can vary based on a few factors, but let’s use a 40% combined tax rate for this example. So 40% of the $20,000 operating profit is $8,000. Let’s see what that does to our formula.
$100,000 (revenue) – $20,000 (cost of good sold) – $60,000 (expenses) – $8,000 (taxes) = $12,000 (net profit)
So if we take a look at the “whole pie”, this business owner would ultimately have 12% profit, meaning they would profit $12,000 if they generated $100,000 in revenue.
So here we are.
That six-figure business that made $100,000 in revenue really only put $12,000 into the pocket of the owner.
That doesn’t seem nearly as appealing, does it?
That is barely 5 figures in your bank account, which equates to $1,000/month.
So how much revenue would it take to make six-figures ($100,000) in net profit that you actually took home? Well, let’s use the same percentages for the above example and find out.
In the above example:
- Cost of Good Sold: 20% of revenue
- Expenses: 60% of revenue
- Taxes: 40% of operating profit
So let’s say that your business made seven-figures ($1,000,000 in revenue). Assuming the percentages were the same (they may go up or down, but it keeps this example easier to follow), it would look like this.
$1,000,000 (revenue) – $200,000 (cost of good sold) – $600,000 (expenses) – $80,000 (taxes) = $120,000 (net profit)
So given the numbers in this example, your business would need to generate nearly $1 million in revenue in order for you to take home six-figures in net profit.
Pretty crazy huh?
Note: Now people can argue the numbers above all day. You could say the expenses are too high or the taxes are wrong. This is just an example. And to give a real life example of a company that I worked with. This company was able to generate $5.2 million in a single year. Want to know what their profit was that year? They lost $200,000. This can happen more often and easier than you think, especially if the business owner is not tracking and managing their cash.
That’s right. This company lost money even though they generated more than $5,000,000 in revenue. That is why it is so important to manage your business financials (more on that later).
Challenge #3: Confusing Revenue With Cashflow
So we just finished diving deeper into revenue vs. profit. Now we are going to talk about another financial issue, which is confusing revenue with cash flow. In a simple world, every time you make a sale, you will collect the cash right away. If this was the case, then we would not even be talking about this.
In the real world, there are many situations where there is a gap in time between when a sale is made and when the business actually collects the cash. For example, let’s say your business makes a sale of $1,000 today, but your customer pays $500 this month and $500 next month. This gap means that there are two basic ways to record this money being made: cash-based accounting and accrual-based accounting.
1. You record revenue when you actually receive cash from the customer.
2. You record expenses when you actually pay the cash out. So using cash-based accounting, if you sign a contract to sell a $1,000 item today and you actually collect the cash today, then you record the income. If you sign a contract for that same $1,000 item but only receive $500 this month and you receive the remaining $500 next month, then you can only record $500 in revenue this month and you will record the other $500 in revenue next month.
1. You record revenue when you actually earn the revenue (often before you actually receive the cash from the customer)
2. You record expenses when they occur or expire (which is likely different from when you actually make the payment). So using accrual-based accounting, if you sign a contract to sell a $1,000 item today, you will record that entire $1,000 of income today, regardless of whether the customer paid you all $1,000, only $500 or $0. If you pay you $500 this month and $500 next month, you will still record all of the income in this month, even though you collected $500 in cash next month.
Companies can use one method or the other, but not both.
A business may tell you about their revenue, but until they actually get paid, they haven’t actually made any cash. This is the difference between revenue and cash flow.
I’ve seen so many businesses run into financial trouble because they are using the accrual-based accounting, record a lot of sales (revenue) but don’t actually collect a large percentage of that revenue.
How can this discrepancy happen? Below are a few scenarios:
- A business may make sales but not collect payment right away. This could happen if the business offers people terms (ex. Net-30, meaning the people purchasing have 30 days to pay after receiving the product or service). They may also offer a payment plan, such as $1,000/month. That means that if the business sold $10,000 in January, they would actually only collect $1,000 in January, then another $1,000 in February ($2,000 total). It would not be until 10 months later (October) that the person collects the full $10,000.
- A business may also have refunds, but they don’t come until later. If a business launched a product and sold $20,000 from the launch, that’s great. But if the product has a 30-day money back guarantee and 10% of the buyers took up the offer, that means that the actual cash is $18,000, not $20,000.
- People could decide not to pay. A business may sell $15,000 and offer terms or a payment plan. If 20% of the people did not finish with the payment plan, the business would only get a percentage of what each person owed (based on when they canceled). So a business may only end up with $9,000 in cash instead of the $15,000 that they would they would get.
So as we can see from this example and the one before it, just knowing the revenue number of a business is not enough. The real questions that you have to ask are what is the net profit and cash flow from the business.
Now, another just plain wrong thing that some people will do is that they will mix cash-based accounting and accrual-based accounting. They report out on both contracts signed and money collected (essentially double dipping).
So let’s say that someone signed a contract for $50,000 in sales, but wouldn’t be collecting it until the future. Let’s also say that they actually collected $10,000 this month from prior contracts. They may report out that they made $60,000 this month, but that is incorrect. They are reporting cash (what they collected today) and accrual (what they sold but won’t be collecting until later). So they are essentially double counting the money.
Challenge #4: Not Realizing What It Takes to Build a Business of That Magnitude
Regardless of what anybody tells you, it takes a lot of hard work to build a business. It also takes money; more than the $6 in the article at the beginning of this post.
Sure, you often see and hear stories of people “turning $6 into a six-figure business” and “starting a six-figure business for less than $100”, but that doesn’t tell you the entire story.
I mean, it’s not like those people just put that $100 into a machine and the machine gave them back $100,000. It just doesn’t work like that.
It takes times to come up with and validate a business idea. This part often gets missed by new entrepreneurs and means that they end up spending a lot of time and money trying to build a business that didn’t have a market from the beginning. It will take a decent investment of time to validate an idea (and you likely will have to go through multiple ideas and iterations before you find the one that really works). You will also be spending money as part of this process, be it on market research, purchasing tools and software to assist you, creating prototypes or investing in consultants/coaches/training to help you get going.
Once you get past validation, you then need to focus on scaling your initial business. You need to market to get more customers and leverage tools, systems and people to keep up with demand as you scale. Growing also requires money, so you are likely going to be reinvesting most if not all of your money back into your business during this phase.
While all of this is going on, you also have to keep on top of the various aspects involved in simply running a business, including:
- Continuing to build or order your products/services to sell
- Planning out marketing and sales activities
- Hiring and managing people (either employees or contractors)
- Managing the books, finances, cash flow
- Planning and defining strategy to grow
- Managing the day-to-day activities, especially issues that arise (because they will arise)
Here are some examples, both for our businesses and clients that we have worked with:
- When we started our real estate investing business, we ended up having to invest $8,000 into our first property to purchase it. We then spent another few thousand dollars to clean it up/renovate it. This was after 6 months of research and work to get the property under contract and actually purchase it. We then initially spent nights and weekends renovating the property because we were still working full-time jobs.
- When we started our brick-and-mortar wine and liquor store, it took over a year to get the licensing and funding to open the store. During that time, we had to invest time and money into the renovations. We also spent time researching the products that we would sell, how we would lay out the store, etc. Once we finally got approval, we had to order all of our inventory, stock it in the store, setup our point-of-sale system and marketing our grand opening. Once we opened, we then had to work the store until we hired employees, at which point we then had to interview, hire and manage these employees, while also planning and growing the business.
- When we started our entrepreneur coaching business, although it didn’t cost us a lot of money because it was a service business, we spent a lot of time trying to understand and find our target customers and our marketing strategy. We then had to hone in our offering/message and determine how to find our initial set of clients. As we grew and began offering products, then we spent more time on software and tools to help us create these products, at which point we then had to focus on marketing and sales not only for our services but also for our products.
You can likely argue all day that starting a specific type of business is easier/more difficult than what we’ve described above. Although that is definitely the case, I can tell you that all businesses face their own challenges. The easier it is to get started (ex. starting a blog), the more challenging it will be to stand out (ex. there are millions of blogs and many bloggers fail because they fail to build an audience).
“The easier a business is to start, the more difficult it will be to stand out.”
You may also believe that building an online business is easier or that these things don’t apply. It is still a business. Friends of ours who have coached hundreds of online entrepreneurs have shared that the timeframe for building a business to sustainable six-figures is anywhere from 1.5 years to 5+ years.
Challenge #5: Not Selecting the Right Trainer/Coach
Can you build a successful business on your own? Sure.
Can you get there faster/easier by seeking guidance from someone who has already done it? Yes.
Can it take longer or possibly cause you to fail if you invest your money into the wrong program or the wrong coach? Definitely.
When people decide that they want to start a business, one of the first things that they do is begin searching around for how to do so. They join entrepreneur groups, read blogs, listen to podcasts and watch videos on YouTube. By doing this activity, they quickly become a target for marketers, and soon enough they begin seeing those ads for building a six-figure business.
There are many trainers, coaches, and programs available to help you build a business. Some of these are AMAZING, others are OK and some are WORTHLESS.
When I wanted to get started in real estate investing, I learned this the hard way. Along with my cousin, we spent $15,000 on real estate training (did we mention that it was on a credit card… and I didn’t tell Ariana until afterwards?) The company was very shady/deceptive, the training was not that great, I really didn’t need that much training when I started and the sessions were in different cities (meaning that I would have to miss work and spend even more money for travel, hotel, and food).
Why am I telling you this? Don’t feel like you need to go out and spend $10,000+ or hire that person in the ad because that is the only way to achieve success. They may be great, and just what you need, but be sure to do some research, get clear on what you really need and compare a few different people/programs. We put together a pretty lengthy article to help you hire a great business coach.
Also, we’ve launched a business training program called Lifestyle Builders that you may want to check out as well (and I promise that it won’t cost you anywhere near $10,000).
Challenge #6: Creating a Six-Figure Business But Not Being Happy
Another challenge that we see a lot with the “successful” clients that we work with is an interesting one; they’ve built up a six or seven-figure business, but are depressed and not happy.
Isn’t building a successful six or seven-figure business suppose to make you happy?
Well, it turns out that the old adage “money won’t make you happy” is true, at least not money on its own.
You see, when people focus on money, they forget about what their original intentions were and what truly makes them happy. Money itself will not make you happy. What likely will get you closer is what the money will enable in your life.
The first step to building a successful business that will make you happy is to understand what will make you happy.
In this video, we actually walk you through the steps to get clear and create your ideal lifestyle.
To assist you with these, we put together a few simple worksheets to help you get clear on what your “ideal life” looks like. This is the first step and should be done before you go off and try to build a six-figure business.
So What Should You Do?
You’ve made it this far… congratulations!
Most people don’t want to face reality, so they will stop reading as soon as we start talking about real numbers and the reality of being an entrepreneur.
But not you. You braved it out, faced reality and are still here.
So where should you to from here?
Below are a few suggestions:
1. Get Clear On What Will Make You Happy
This may sound a little woo-woo, but it is so important. We’ve come across so many entrepreneurs that are not happy with their business and their life. We’ve also encountered many divorced entrepreneurs. It is so unfortunate to see, especially given the sacrifices and journey that they have been through in order to create that business.
Do yourself a favor (and save yourself from this fate). Take a little bit of time to think about what makes you happy, and what sort of business you will need to build to either maintain that happiness or to create more happiness in your life.
If you need some help, we’ve put together a few simple worksheets to help you get clear on this.
2. Get Clear on Your Finances (Both Business and Personal)
Numbers tend to scare most people. As a result, most people don’t pay enough attention to their finances, be it personal or business. This then leads to various issues, be it running out of money, running an inefficient business (read – less profitable) or just stressing because your business just doesn’t seem to be making what it should be given your time and financial investment into it.
If you need some help with this, we put together a few free resources for you:
3. Seek Out Assistance
You don’t have to do it alone. In fact, just about every successful person (entrepreneurs and non-entrepreneurs alike) have help. They take training, they hire coaches and they are constantly learning.
If you are looking for some assistance in starting or growing the business of your dreams, Ariana and I are here to help you. Head on over to our work with us page to see the various ways that we can help you achieve more success in your business.
We offer various options based on where you are at, whether you haven’t started a business yet all the way through building a successful business and trying to figure out what is next.