Make Millions - well, not really

Did I make millions when I ran my own business? Yes, I certainly did. A couple million at that. It was an exciting day when I made my first million. It looked great on paper, but I kept everything in perspective, so I didn't run down the street naked, shouting at the top of my lungs.

I'm certain the neighbors all appreciated my restraint because at the time I lived in a modest, quiet urban area immediately surrounding downtown Cheyenne. And, I didn't have a physique appropriate for streaking.

There are numerous reasons that I didn't celebrate. First of all, I didn't really make a million dollars free and clear. It was gross revenue, so that first million didn't wind up in the bank. If we look at where it went, we'll better understand why it's important to keep things in perspective when we talk about people who claim to make millions.

Time Span

There is a big difference between those who make millions each year and those who make millions over the span of years. In my case, it was the latter - about 2 million over roughly 10 years. That's still a healthy bunch of revenue, but stay tuned as we discuss how that is whittled down to a much smaller size by all of the usual suspects.

Think of it as the incredible shrinking dollar, or so it seems to be. More correctly, there are many who need and want a piece of your action, so if your interest is to keep more for yourself, you'll have to limit the number of people that share in it with you.

Travel and Living Expenses

The line of business that I was in required lots of travel. So much so that I often thought that I simply traveled for a living. With all that travel came quite a few direct costs such as airline tickets, lodging, car rental, gas for the rental car, meals away from home, bridge and road tolls, airport parking, city parking, and personal vehicle mileage. I'm sure there are more examples, but you get the idea.

For a week of travel, it wasn't uncommon for the cost to be anywhere from $1,500 to $2,200 when it was all said and done. Travel costs for one year would typically range between $25,000 and $35,000. Like I said, everyone wants a piece of your action, and the folks who fly planes and rent cars know that these direct expenses are necessary for you to conduct your business.

So, when you make millions, you need to shave a bunch of that gross revenue off because it's attributable to travel and living expenses that you paid to someone else at an airline, a car rental company, a hotel chain, and a bunch of restaurants.

Materials, Supplies, Tools and Equipment

If you're in the construction business, materials and supplies will represent a very large part of the direct costs of doing business. Tools and equipment might figure into your direct costs as well. I'm guessing that at least 25% of your revenue would be consumed by materials and supplies.

For my consulting business, most of my materials, supplies, tools and equipment were handled as indirect costs because they were generally used to service the needs of all of my customers. I seldom purchased anything specifically for a customer. There was one notable exception. A client of mine was having a difficult time getting a photo copier for his large department, so he bumped up the contract amount to cover the cost of a new photo copier. We immediately purchased the copier and installed it at the job site. After we finished the job, as you would expect, we "forgot" to take home the copier.

In any event, materials, equipment, parts, supplies and other items that you purchase in order to finish a particular job represent more money that gets taken away from your effort to make millions.

Employees and Subcontractors

Small businesses have a huge part of their gross revenue lopped off by the cost of employees. It's such a large component of cost that it's the first thing they look to in order to cut costs - a layoff.

If you're a "one-zee" like I was, you'll have subcontractors working for you on occasion and they can make a healthy check from your customer look rather anemic after you get done paying them. Consider a job I had once where a customer sent me a check for $48,000 for a month's worth of work. About $30,000 of that went to subcontractors that I had to have on the job in order to do the technical work. That's over 62% of the income going to "others."

Okay, so you can see that people who make millions on the surface have to share a large amount of that with employees and subcontractors. Businesses do make millions, but what counts is what you end up keeping yourself.

Indirect Costs

Outside of travel and living expenses, indirect costs were the single largest controllable factor that chiseled away at the money I made. The idea here is that there is a cost of doing business that is generally associated with conducting business, and not directed linked to the jobs and projects that you do for your customers. Hence, these costs are indirect. Nevertheless, they chip away at the money you make and you need to be mindful of them.

Here is a list of indirect expenses that you need to consider:

  • Office space that you rent or lease, and maintenance and improvements that you need to make in support of your business.
  • Computers, printers, scanners, copiers and fax machines in your office or those that you take with you in support of your work.
  • Insurance of various sorts including liability and errors and omissions.
  • Professional help from attorneys and accountants.
  • Mailbox rentals or fees for post office boxes.
  • Postage and private carrier delivery costs.
  • Utilities like electricity, gas, water, phone, cell phone and Internet service.
  • Training and continuing education.
  • Employee benefits such as insurance programs and bonuses.
  • External hard drives, routers, projectors, cameras, display screens and similar support equipment for getting things done.
  • Paper, pads, binders, pencils, pens, ink cartridges, paper clips, dry erase boards and supplies, and other consumables necessary to conduct your business.
  • Meals, entertainment and gifts associated with customer meetings.
  • Travel and living expenses associated with conferences, trade shows and business development trips.

Consider this to be a partial listing. It doesn't even include lawsuits, losses and non-payment of invoices. I think you get the idea. You can make millions over the years, but you're going to spend a lot in overhead to support such a business.

Taxes

Here is the one we'd all like to avoid, but it's impossible to do so. Government always has its hands out to grab a bunch of the wealth that you try to create. It's where government gets money to begin with - from those who produce wealth through private enterprise. And, they understand their job very well - consume the wealth of others.

I am reminded of a song by Bread:

"the more you make, the more they take
you never seem to get ahead"

Just so you don't loose sight of the tax burden that government imposes, there are:

  • state income taxes
  • federal income taxes
  • corporate taxes
  • inventory taxes
  • business licenses
  • regulatory fees

...and the list goes on and on. The trick is to minimize your exposure to taxes and fees by selecting one of the small business ideas that the government hasn't decided to tax into submission or extinction.

Summary

The next time you hear about someone who claims to make millions, just remember that there are often serious and ongoing expenses associated with making money, and those expenses usually get higher as your income increases. Some costs are directly associated with a particular job or contract, and other are generally associated with you simply keeping the doors open.

Everyone is out there trying to get a piece of the action. Private parties and organizations that support your business efforts have to be paid. And, the government legally steals a good portion of what you manage to make because...that's what they do best.

So, now you know why so many who make millions aren't running naked down the street and shouting at the top of their lungs. It's simply because their take of the money is quite a bit smaller once everyone else gets paid and the government has taken their share. The lesson for us all is to choose wisely when it comes to small business ideas so that we minimize costs associated with conducting business. Only then will we really have a chance to make millions.

Done with Make Millions, take me back Home



The only business you'll really ever be part of is your own.

Wondering about what to do with your savings so inflation doesn't eat it up? Start your own enterprise. It's a good way to invest your capital and make it work for you. Who will be better at keeping an eye on your investment than you?