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Entrepreneurs’ Key to Financial Success: Calculate Your Output

| June 21, 2017
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I can pretty much assure you that there is a distance between the life you live now and the life you dream of.

In this series, you’ve learned to define your starting point, define your end goal and measure what you need to save in order to live that surplus or superfluent life.

Now that you have your goal numbers in mind, you need to figure out how to improve your business so your income fuels your lifestyle (not the other way around). Instead of just aimlessly trying to improve your company and treating increased cash flow as found money, having clearly defined goals will boost both your business ledger and your personal bank account.

Understand Current Production

What can you produce in an hour?

For small business owners and hands-on entrepreneurs, this will be an easier question to solve. You can look back over the past few months, weighing the time spent against production. For owners of larger businesses you need to calculate this against the “highest best” value you bring to your company to calculate your value per hour to your business. Work out a formula involving these numbers, putting an emphasis on profit and personal income generated.

When you map out your production, you can figure out a few key facts. For one, are you operating at (or close to) 100 percent efficiency? Next, what could you do better?

Far too many entrepreneurs don’t really take this step. They can easily measure profit, but they don’t take into account time spent. If you know that one hour or one day of your team equals X dollars in profit generated, you have a basic foundation of understanding.

What Needs to Change?

Next, you can figure out what you need to do: either increase the hours spent or figure out a way to become more efficient in that time frame. It could also mean business expansion. Maybe you’d be able to double your revenue if you open a store in a new market by the end of the year.

If this seems too overwhelming, start with one KPI you can increase by the end of the quarter or the end of the year. If you can gain X new clients, how much increased revenue does that mean for your company? If you find a way to sell X more units of product each month, what specific impact does that have? These are the numbers you need to solve before moving forward.

If you know that you need to ship 50 more units each month in order to generate enough revenue that you can save money toward a superfluous lifestyle, you now have a business growth plan.

However, it is important to note here that financial independence will not come strictly from your business ledger. You’ll only gain the financial independence that you seek within your personal account.

Simply generating more revenue isn’t enough. The objectives need to be tied directly into your lifestyle goals.

The Four Numbers

As you start to boost your business in order to save for a better future, I need you to keep four very important numbers in mind: 4, 20, 65 and 95.

What does this mean?

  • The most you should take out of your assets and portfolio is 4 percent per year.
  • You need to be able to consistently save 20 percent of your income.
  • If you are healthy at age 65, your chances are greater that you’ll live to see 95.

As you calculate your goal numbers, as well as what you need in order for your business production to grow, keep these numbers in mind. That 20 percent needs to cover not only enough to save for a sufficient lifestyle (the bedrock of your retirement, or “Entire-ment,” as I like to say) but your surplus or superfluous lifestyle -- whichever you’ve defined as your goal.

So the million (or billion) dollar question is: what do you need to produce in order for 20 percent of your income to fuel the lifestyle you’ll be living at 65 and beyond? Additionally, keeping in mind that once you decide to slow down and enjoy the fruits of your labor, the absolute maximum you can withdraw from your assets is 4 percent per year.

Once you’ve solved that equation, you can move forward with calculated business plans aimed at building a comfortable (or gilded) existence.

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