204: Profits vs Salary

Profitability is something that most entrepreneurs fail to understand. I know because I failed to understand it for years.

For a long time, I would say things like, "We have a 50% margin."
And while in some ways that was true... it was also a lie.

It was a lie because what that margin failed to consider was that I was working as an employee within my own business.

I was closing the sale.
I was managing the client relationships.

Even though we may have only spent 50% margin servicing that customer, the truth is, we were spending more. I just didn't see it because I was paying myself for those roles.

It was hard for me to grasp this fully until I replaced myself in sales and client management.

Once I had two more people hired and in those roles, it became clear.

"Oh... we definitely don't have a 50% margin."

Instead, we had a much lower margin now that the full business cycle was being completed by someone other than myself.

The profitability of your business is different than your salary.

Ask yourself what it would cost to hire someone to replace each role you fill.
Subtract those numbers, and then you can see what your real profits are.