One of the top reasons to start a small business is to escape from a corporate job and gain personal and financial freedom.
But how much revenue does it take to ditch the suit and tie and replace your corporate salary with earnings from a small business? Let’s find out.
One-hundred thousand U.S. dollars is a lot of money. Six-figures is $100,000, that’s a lot of zeros. The first thing we need to do is justify that choice. Not everyone needs $100,000 a year to live a good life.
I’ve chosen to go with $100,000 for this exercise. In short, here’s why:
- This is roughly what a professional working at a corporation in the United States might expect to earn. Yes, the average wage in the U.S. is $65,836, but corporations are expected to pay slightly more and $100,000 is not an unreasonable expectation.
- From what I can tell, professionals working corporate careers have a certain standard of living they expect. Between houses, cars, insurance, utilities and other costs of living this can quickly add up to where they will need $100,000 to sustain their lifestyle.
- Small businesses have a lot of benefits, but they are perceived as riskier than a standard corporate job. So even if you think $100,000 is a little high, it’s wise to bake in some buffer to account for more uncertainty or variability in earnings.
- Corporate earnings grow over time. I know my friends with corporate jobs expect pay rises every year and have certain expectations about what they will be earning in the future. The small business owner also needs to be rewarded for their efforts if they choose to go on their own path.
Plus, you can easily adjust the numbers here for your target earnings in your country, for your lifestyle and for your currency. So I’ll stick with $100,000.
How Much Revenue Do You Need to Quit Your Career
How much revenue you need to replace your corporate job is mostly dependent on how good you are at converting your revenue into distributable cash, or profits. Obviously, the more money you make per dollar of revenue, the less revenue you need to replace your job.
Making $10 per $100 in revenue requires substantially more revenue to achieve your goals than if you are making $50 per $100 in revenue. It’s the difference between $2 million and $200,000 in revenue you would require.
So profit margin is obviously the driver of this question.
To help, here’s a table of the revenue you’d need to make six-figures (our $100,000) at various levels of profitability:
|Profit Margin||Annual Revenue Needed for Six-Figures|
They range from heart racing to manageable. The truth of the matter is that the average small business has a profit margin of 10%.
Definitely some food for thought.
Are There Any Other Considerations
Yes! Small business owners get access to grants, government programs, tax benefits, and more. You should learn more about these in your country, and if you are unsure, get professional advice on what you can.
But the one I want to focus on is equity.
You own your small businesses and (in just about every circumstance) could sell it too if you wanted to. So you have equity value in your small business. It’s unlikely that you will have any (or anywhere near as much) equity in the corporation you are working for.
Sounds funny, but people can forget this.
For example, if your small business is valued at $200,000 and you work on it for the next 10-years, it might be worth $400,000 by then. That’s $200,000 more equity value and the equivalent of $20,000 per year if you count it in a straight line. You could easily decide to think about this as “extra” earnings, making the earnings and level of revenue you require lower.
In this instance the requirement to hit six-figures comes down to $80,000 per year (from $100,000) and changes the revenue you’d need at various levels of profitability to:
|Profit Margin||Annual Revenue Needed for Six-Figures|
Slightly more manageable.
The key point is that if you start or buy and then run a small business, every improvement you make to the business, it’s profitability and the sustainability of those profits, will add to your equity value.
You can look at this like a nice bonus on top of the earnings you take out of the business, or count it against the $100,000 target. Totally up to you. Just remember it is there, and that you benefit from building long term value.
If Cash Flow is King, Profitability is Queen
The saying is right, cash flow is king. But cash flow is driven by revenue and profitability (and capital expenditure, but we’ll keep it simple here).
The market and your industry will largely determine your level of profitability, so choose wisely. Then do things to ensure profitability.
This means you should decide to play where profitability is high, and where you can do things to control your level of profit. With this, should you choose to leave your corporate career for a small business, you'll be that much closer to replacing your six-figure income.
Before you go...
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