How much money do you need to pull out of your business each month to cover your living expenses? That’s a question most business owners ask themselves. Typically you pay yourself a salary and from time to time take out an owner’s withdrawal directly from the company’s equity to help cover surprise expenses.
Many small-business owners try to set their total cash withdrawals based on what the business can afford. However, rather than focus on what you can afford to pull out of the business, you need to focus on how much you need to earn at your business in order to afford the lifestyle you want to have. This is where the Personal Earnings Goal, or PEG, comes into play.
The PEG Formula
The PEG is a simple formula that will revolutionize your way of thinking about business profits. I developed it as a methodology specifically for small-business owners, especially those in service fields like consulting. To calculate your PEG, follow these steps:
1. Determine how much money you want to pull out of your business. This amount should be based on your household budget. It should include fixed expenses like your mortgage, insurance premiums, car payments and tuition. It should also include variable payments like utilities, food and clothing, as well as a component for surprise expenses and savings. Let’s say that you calculate your household budget at $15,000 per month. This is what you need to be able to pull out of your business every month.
2. Now, calculate your living expenses per hour. On average each month has 720 hours (30 days x 24 hours per day). If your budget is $15,000, then it costs you and your family $20.83 per hour to live ($15,000 / 720). Every single hour of every day, you're spending nearly $21.
3. Calculate your productive hours. Out of the 720 hours per month, most of that time isn’t spent working. Assume that you work nine hours per day Monday through Friday and another four hours over the weekend; that's 49 hours a week, which comes out to 196 working hours per month. However, just being “at work” doesn’t mean you're being productive and it certainly doesn’t mean you're doing anything that actually earns you money. So, being generous, let’s assume that during the week you have a solid three hours per day of truly productive work and we’ll assume that all four weekend hours are productive. That works out to 76 productive hours per month.
4. Calculate your PEG. In this example, you need to generate $15,000 over the 76 productive hours per month. That works out to $197.37 per productive hour ($15,000 / 76). $197.37 is your PEG. If you calculate your own PEG, you're likely to be shocked at how much you really need to earn per productive hour. The more time you waste on tasks that aren’t productive, the higher your PEG will go. If you miss just a few hours of productive time per week, it could generate thousands of dollars in earnings shortfall per month.
Why Your PEG Number Is Important
The purpose of this exercise is to impress upon small-business owners the value of your time. You simply can’t afford to waste it. If your PEG is $200, then a wasted one-hour meeting that includes two hours of commute round-trip just set you back $600. An unproductive business trip could cost you thousands.
Prioritize your time by focusing on activities that will help you achieve your PEG. Ask yourself, “Before I do this, will it help me toward my PEG or not?” You’ll find yourself saying no more often than not. And that's a step in the right direction toward higher earnings.
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