Let’s Talk Profit | When $130k Per Year Isn’t Enough

336. Let’s talk profitability

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Brian: [00:00:00] I was talking to a freelancer recently who had to pack up shop, move on to something else because they weren't making enough money. They weren't making what they needed to make at least. And this is sad anytime I hear it Typically this is because people have a lack of clients, and their income is too low, and then they have to go get a day job or whatever. But this is not the case here. This freelancer was making 130, 000 a year. And it wasn't enough to get what they needed to make ends meet. Personally, ~so I really wanted, and because he is ~is because he fell into the mistake that a lot of people fall into.

Brian: And that is focusing on income while ignoring profit margins. ~There's a reason that episode, there's a reason we have an episode called, there's a reason that episode 262 is called a hundred thousand, why a hundred thousand dollars per year is the, let me try one more time. ~There's a reason that episode 262 of this podcast is titled why a hundred thousand dollars per year is the new minimum wage for freelancers.

Brian: It's because of this exact same thing. If you don't focus on profit margins and your income keeps going up, you end up not making what you want. And a lot of cases, and this is the case I think in this person's position, they can make more from a day job. ~And so in some cases, ~and in some cases significantly more.

Brian: ~So obviously if you can't, ~so obviously if 130, 000 a year isn't enough to get by, not enough to survive off of something is obviously wrong in any business. It's not what you make that [00:01:00] matters. The revenue number, the top line revenue number is not really what matters, it's what you keep.

Brian: So instead of ~finding, ~just finding more ways to get more income as a freelancer, which is an important part of this, this episode I want to dedicate to how do we actually keep more of it at the day? ~Because if it's, ~because if your business isn't sustainable, meaning your bank account shrinking every month, even if you see revenues going up, if it's not sustainable, ~it's going to suck your soul dry as quickly as possible.~

Brian: ~It's going to try again, ~it's going to suck your soul dry very quickly. It's not fun to be in a failing business,

Brian: but if we can focus on increasing your profit margins AKA, what do you actually make as a freelancer every year? If that number continues to go ~up and ~up and up and up and up and up, you'll quickly start to see your stress levels fall as that bank account rises.

Brian: Because the last thing I want is anyone that I know making 130, 000 a year and it not being enough to make ends meet. And before you ask, it wasn't a super expensive cost of living area. It wasn't like they were in New York, LA. And also it wasn't like they could just go to a corporate day job, making a quarter million a year or anything like that.

Brian: It's not, it wasn't any crazy scenario like that. It was just literally his business was not profitable enough.~ It's just, it was just literally his business wasn't a profitable enough. this is your first time ever listening to the podcast, hi, I'm Brian hood, I'm the host of the show found over six figure creative.~

Brian: ~This podcast is for you. If you are a creative freelancer, you offer freelance services, And you want to make more money from those services without selling your soul. This podcast is for you. If that's,~

Brian: this is your first time listening to the show. Hi, I'm Brian Hood. I'm host of the show, the founder of Six Figure [00:02:00] Creative. And I created this show for other freelancers, specifically creative freelancers who want to make more money from their creative skills without selling their souls. If that sounds like you, you're in the right spot.

Brian: ~So let's get into this. ~So let's get into this. Let's talk profitability. Let's talk about the old way versus the new way of profitability. Here's the old way. Income. Minus your expenses equals profit. So in this person's case, 130, 000 minus whatever their expenses were equals what they get to keep at the end of the day.

Brian: That's the old way of running a business. ~ And if you know what, if you know, you know, at at this point, ~if you've heard this before. It's probably because you've read or heard of Profit First. And what's funny is, I run my business off Profit First, which I'm going to talk about this episode.

Brian: This entire episode is not about Profit First. We have other episodes on that. ~But I still want to, I want to briefly touch on it today. So don't tune this out if it's a new concept. ~So don't tune this out if it's one you've already heard before. ~And if you don't know what Profit is, ~and if you don't know what Profit First is, I will explain that to you.

Brian: ~But before, ~but I've been running my business off Profit First for a year, year and a half at this point. And it's been going wonderfully. And what's funny is, even with that, I started to outline a full episode on like, Expenses and incomes and all these things and when I realized I was doing was literally mapping out this old profit model where I'm thinking what's your income, what's your expenses, [00:03:00] and this is your profit margins, how we can get these up.

Brian: That's a flawed way of thinking it took me a second to shake myself out of that when I was outlining this episode of what I wanted to talk about today because the new and better way is the profit first model. ~It's new, it's, ~I'm putting new in air brackets, like profit first came out like so long ago,~ oh god, ~over a decade ago, so if you haven't heard about it by now, You're just not an entrepreneur and that's okay. We're working on it. We'll get you there.

Brian: But the quote new way, the decade old new way, ~which I guess in the grand scheme of business is pretty new of how long, ~which, if you look at the grand scheme of how long business has been a thing, a decade, it's not very long, it's new, but the new way is income minus profit equals expenses. And that's the profit first methodology.

Brian: In a nutshell, as a business. So in this case, we've been 130, 000.

Brian: You take out the profit you want to make, which in this case would have been about 75, 000 or 80, 000. And then what's left over is what you can run your business off of. And which in his case was 50, 000. ~You can run your business off 50 K. ~If you can't run your business off, what's left over after you deduct your profit from the business?

Brian: Meaning profit is just how much do you actually keep as a business owner in the freelance world? Profit is just what we keep. In the big business world, it's more complicated than that. But in our world, after we take what we want to take from our business, [00:04:00] if we can't run our business off the rest of it, then we've got to change something significant, So in this person's case, and I'm referring to in this episode, and we'll probably refer to throughout this, it was 50, 000 a year would have been left over if he ran his business off profit. First 50, 000 a year, that's 4, 100 a month in some change. But in his case, 4, 100 a month, wasn't enough, not for his rent, not for his bills and not for his assistant, his assistant as well. So what do you do in this situation where you're making good money, but you're not profiting enough or what do you do to prevent this so that as you make more money as a freelancer, you don't get in this, predicament where your income is going up, but you're not taking home more money.

Brian: There's only one way to do it. You ~find a way to run your business off that 50, 000 a month. There's only one way to do it, and that is ~find a way to run your business off of that~ of ~50, 000 a year, or that 4, 100 a month in this specific example, in your example, the numbers are going to be different

Brian: and there is no other way, period. That is it. You find a way to run your business off the amount you have once you take your income minus your profit. That's it. ~the method, and the reason that ~the reason this has been so popular over the last decade, the reason that Mike Michalowicz book has blown up and it's like a big bestseller in the business world.

Brian: He's a well respected author and consultant now, and he has many other great books. He's even been on this podcast before. The reason this [00:05:00] works so wonderfully is because when you run your business the old way, where you take your incomes minus your expenses, And you left over the profit. The equation is flawed because you start spending money you shouldn't spend ~because you don't think through, I'm sorry ~because many freelancers think when I'm making great money, I can just spend it on what I want.

Brian: I want to buy that gear. I want to buy that new device. I want to buy that new thing, that new software, that new hardware. I want to upgrade to the better fancier office I want to get a dedicated studio for my thing.

Brian: I want to redecorate. I want to refurnish things. And so as you spend more and more and more, your profit margins get squeezed down significantly and you don't find out about it till later, right? When you're looking at your bank account, realizing how did I make so little money? And then you're trying to search things down in retrospect where you can't do anything about it.

Brian: ~The reason profit work, ~the reason the other way works better where you're taking your income minus your profit is because when you have a pool of money left over and you say, this is what I have to spend on my business. I cannot spend any more than this. You start behaving differently. You start to actually have to follow a budget, which by the way, but doesn't have to be crazy.

Brian: It's just if you have 4, 100 a month to live off of, For your business and two [00:06:00] grand of that goes to rent a thousand that goes to software

Brian: and the rest of it goes to other Miscellaneous things like if you're paying for a business coach like us. Hey, or you're paying for software subscriptions or you're paying for Investing in new gear or whatever.

Brian: You don't go off on these big spending sprees just because business is doing well right now

Brian: that's the profit thing in a nutshell We have a whole episode that breaks down this a bit more on episode 253. That's six figure creative comm slash two five three You

Brian: But I want to talk about the business fundamentals here because there were some things he could have done in his business to cut expenses. But there's some other things I think every freelancer listening to this podcast who's concerned about profit margins. Should be aware of when they're thinking through their business.

Brian: ~And the first and foremost question I have to ask anyone is, and the first and foremost thing I have to ask, tell anyone to do is ask yourself this. Are all services equal for you? Let me try one more time. ~And the one question I have to ask anyone listening to the podcast is this, are all services equal to you right now?

Brian: Are some more profitable for you compared to others, especially for flat rate services,

Brian: this is a hypothetical question. Example here, you might offer service a, and it's a flat thousand dollars and service B is a flat 5, 000, but service B takes you a hundred hours while service a takes you two hours. [00:07:00] Crazy, easy example. Cause service a 1, 000 service, you spend two hours on it. That's 500 bucks an hour versus service B it's 5, 000, but it takes you a hundred hours to fulfill.

Brian: So you get 50 bucks an hour.

Brian: In which case, which service do you put more focus on?

Brian: And this is where we get into something called opportunity cost. ~And this is where we, and this is where we chat about something called opportunity cost. And that is when we pursue opportunity A or service. ~And that is when we pursue one opportunity over another opportunity. ~And I'm sorry. And that is when we pursue both opportunities at the same time, or we do both services at the same time.~

Brian: We are taking away focus from the more profitable activity that we could be doing because people want us to do the very unprofitable activity. They want us to do that 50 an hour project versus the 500 an hour project. So you start taking on more of those projects. And because those projects take more time and they're less profitable, you have less time to do these highly profitable projects.

Brian: Projects that you're getting less of. And so now you get this referral circle. Everyone wants you for the unprofitable service because that's what you're doing more of. And so more people are referring you for that. And the service that's really profitable that you do less often because you have less time to focus on it is getting less referrals because you're doing less of those projects.

Brian: You're becoming less and less known for that specific, highly profitable thing.

Brian: ~ in, sorry, this is me ~this is me in my recording studio I was Producing bands full time doing full music production where I was tracking, [00:08:00] editing, mixing, mastering, had the band living in the studio with me. And that was, I'm going to misquote the numbers here, but that was 40 or 50, 000 a year of my income.

Brian: But it was like 80 percent of my time spent doing that. And then the other service was mixing and mastering, which is all done remotely. And the files were sent to me remotely and I would spend 20 percent of my time doing that, but that was like 60 or 70, 000 a year of my income.

Brian: And when I did the math on that, only after retrospectively looking at for the entire year. Where did all my income come from? Where was all my time spent? Doing the exercise that every freelancer should do, I realized Unfortunately, I had spent an entire year doing things that were making me very little money and causing a ton of stress.

Brian: So what did I do? I completely cut out that service that I was really well known for ~full production, full service, music production, full pardon me, ~full service, music production, so that I could take that time back and invest it into other opportunities of greater importance. And that's where I started mixing and mastering more bands.

Brian: So I was making more money doing that. I got my income up to 350 an hour doing that. As a freelancer ~working with middle ~working with heavy metal musicians, right? That's crazy.

Brian: I launched my very [00:09:00] first course. It was a heavy metal mixing course called from shit to gold. I sold to this ~to ~date somewhere around a half a million dollars of that course. I wouldn't have had time to do that if I hadn't cut out tracking the last band I ever recorded was February, 2015 and I launched that course fall 2015

Brian: and weirdly I still sell copies of that course To this day. I've made thousands of dollars off that this year. Almost a decade later, because again, opportunity cost,

Brian: ~is also this ~this opportunity costing was exactly what's happening to the guys talked about earlier, the hundred 30, 000 a year freelancer who wasn't making enough ~to~ to make ends meet. He was focusing all his time, effort, energy on one service where an assistant helped him. And because of that, he was neglecting other services with higher profit potential, and he didn't have time to grow that at all because all his time, effort, energy, and focus was spent on the lower profit margin thing.

Brian: So he was stuck in this loop of every year for like the last four or five years had made over a hundred grand, but every year his profit was going down further and further.

Brian: So if you kill off the unprofitable services, the things that earn you very, low dollar per hour for the amount of time, effort, energy, and [00:10:00] focus it takes away from you for all those things you kill off in your business. You can significantly grow your business if you take ~that ~all that time, effort, energy, emotion, focus, and put it into the thing with a higher profit margin.

Brian: And this obviously is assuming that those two things are equally enjoyable to you or relatively close enjoyable for you. In my case, it was the case that the thing that I hated doing was the thing I also made very little money on. And the thing I love doing was the thing that made me a~ a lot of ~lot more money.

Brian: So that was like perfect scenario. But when you look at that, ~I spent, oh, ~I spent six straight years. Doing that service that I shouldn't have been doing. Well, I'd say four of those years. I should have been doing it, but the last two, I should have been doing those services,

Brian: but I don't want you to make that same mistake.

Brian: Now let's talk about my~ my ~freelancers with a team. So maybe you have subcontractors or maybe your agency owner. Like we have~ have ~actually have a decent amount of agency owners that listen to this podcast, ~who that ~that case, you definitely care about profit margins, ~but ~but I'm just going to give blanket advice here that I've learned from many different resources, ~especially ~specifically, even Alex Ramosy states this exact thing, but generally speaking.

Brian: ~Your, if your cost of goods, ~if your cost of goods sold is above 20%, which I'll explain this in a second, it's going to [00:11:00] be nearly impossible for you to maintain reasonable profit margins.

Brian: Cost of goods sold is just how much ~does ~it cost me, the business owner, to fulfill on a service. And that comes into play when you have a team.

Brian: You could also lump software into that. ~So like in, ~I have a bookkeeper now, and we do a monthly meeting every month where we go back through all my expenses and we~ we ~do revenue projections and all these fun things. But we actually lump certain softwares into our cost of goods sold because for every client that we get, there is a incremental co~ co ~increase in cost of the software that we use to fulfill for certain platforms.

Brian: ~So ~So that just means that goes directly towards a new client or fulfilling on that client. ~if there's, but getting away from the new shit here, it just ~but getting away from the new shit here, it just basically says,~ says, ~When I do a service, how much is going towards fulfilling on that service? How much money? So if I hire a contractor, that money that I'm hiring contractor or subcontractor to do something on, that money is directly a cost of goods sold.

Brian: So my, it's called gross margin or gross profit. ~My gross profit, not net profit, ~my gross profit is what's left over after fulfilling on the services. ~And then from that gross profit, I'm going to ~Then you have other things like your bills and your rent and your, other typical things you spend.

Brian: And then what's left over to that is the [00:12:00] net profit, which is what you pay yourself out. ~So I'm getting, ~I don't want this to be an accountant lesson, but I want to, I focus on that 20 percent rule, right? Where ~if you, ~if your cost of goods is more than 20%, you're going to have a hard time.

Brian: That means if you have a 5, 000 project, then you can spend up to 1, 000 on cost of goods sold. Meaning to fulfill that thing, you can spend up to a thousand dollars. That's assuming, by the way, that you're doing not of anything else to fulfill on that. ~That's assuming that someone is taking that away.~

Brian: ~And ~if you look at bigger agencies, that's how they run their agency. They may get a 10, 000 or 30, 000 or 50, 000 project, and they're paying out 10, 15, 20 percent to the subcontractors who's actually fulfilling on that. ~And ~And then the agency takes the remaining amount of that and put it towards other expenses like payroll, investing in new things, client acquisition for themselves.

Brian: ~if this, ~if these numbers don't work for you, then you have to charge more in order for that to work. If~ If you're going to do things like subcontract work out to people, ~you cannot get them to fill in it~ it ~for less than 20 percent of the overall project value, then you have to increase the cost that you are charging until that 20 percent rule holds up.

Brian: ~the case ~So the case going back to the original person I talked about on this podcast 130, 000 a year person in his case I don't believe that that was true I don't have [00:13:00] all of his ~like ~profit loss statement know all his numbers and out like you should as a business owner and like I know about my Own business, but I can reasonably tell you with almost dead certainty that what he was charging for his services He was not Following that 20 percent rule.

Brian: So we've talked about this 20 percent rule for subcontracting, meaning that any subcontract you take on should be less than 20 percent of the overall project value. ~And we've talked about, kind of pumpkin plan. ~If you've read Mike McAuliffe's other book, the pumpkin plan, following the pumpkin plan of your services, where I guess it's an 80, 20 analysis.

Brian: What's the 80, 20 principle for your services? What's the service that brings in the most income. That's the most profitable. ~It less ~It takes the less amount of time. That's a service to put all your focus and your effort and your energy and your emotion behind growing~ and your and ~and you start weaning yourself off of or completely cutting out those unprofitable services so that you're able to take that energy and shift it to the more profitable services.

Brian: ~Those are like two huge things that if you do those things, you will have a higher profit. Amount, you'll take more money home at the end. It's those are two huge things that if you do that, ~if you do those two things, you will take more money home with you at the end of the year or the month, which is the goal here.

Brian: But I want to talk about two other things to talk about with profitability. Really one more thing. The other is just a reminder. The first one is just raise your damn rates, I've talked about this all the time. I'll~ I'll keep up. ~preach this to the cows, go [00:14:00] raise your damn rates. ~If you're, ~if your profit margins are low, it's, Almost certainly because your prices are too low.

Brian: Your services are too low. So that's just a quick reminder. The second thing is streamlining your workflow helps substantially with profit margins because, and this is one of the, to me, one of the most straightforward, easy ways to increase profit margins because every hour you save on fulfillment is an hour that you get back either in profitability or ~row, ~lowering your rates to stay more competitive.

Brian: And this is how I was able to make over 350 an hour as a mixing engineer in heavy metal music mixing. For years I did this

Brian: was because I was able to keep a highly competitive price I think it was charging five or 600 bucks a song at the time, which is very comparable, actually lower than many mixing engineers of that quality because, and only because I was able to fulfill on the mixing project faster than a lot of other people.

Brian: Because I had followed all of the, what do you call the easy gates, automation, delegation, elimination, mitigation, those four easy gates, we call them,

Brian: I guess the better way of saying it would be Automate. [00:15:00] Delegate. Eliminate. Mitigate. That's why they're called the easy eights. But I fall that to a T. And where someone may take five to eight hours to mix one song, I would take one to two.

Brian: So not only could I keep a competitive price, ones that weren't crazy high, they weren't crazy low either, but they were competitive. I wasn't way out of left field in my niche. I was also able to have easy eights.~ easy eights. ~Really high profit margins or my hourly pay, my hourly earnings, my dollars per hour, which is another way of looking at it.

Brian: What do you actually have to keep per hour? I also, as far as my business goes, I wasn't running my business based on profit first back then, but I just had really low overhead, which is another huge advantage that I had, but streamlining my workflow helps in so many different ways, because when you don't have a streamlined workflow and you take longer to fulfill ~the only two ways that you can actually The only two ways that you can actually fix this is either by ~the only two ways that that goes is you're either going to pass that cost on to your client meaning they're gonna have to pay more For the same level of service as someone who works more efficiently than you, or you're going to have to take that hit and stay competitive price wise.

Brian: But that means you earn less per hour. That's not a good thing.

Brian: So in the case of the person that I'm referring to [00:16:00] for this episode,

Brian: we'll call him Billy Bob. Billy Bob making 130, 000 a year ~could have followed this episode, could fall. He still could possibly ~could have followed this episode to cut out the unprofitable services, start charging flat rate pricing, find ways to build efficiency. Because by the way, if you. Becoming more efficient and delivering things faster, more efficiently, and you're not flat rate pricing, then the only person who benefits is your client.

Brian: So for example, if I was charging per hour for mixing services, and I kept getting more and more and more and more efficient per hour, then the client is the one who makes all those savings. I hope that makes sense to you. Cause that's a really important point ~ to, ~to understand. But if Billy Bob

Brian: could have had a combination of all these things, raise the rate slightly so that he could afford to pay his assistant to deliver on his services, or just cut out the service. It requires the assistant altogether and just do work without the assistant. If you can't afford it,

Brian: streamline workflows

Brian: and follow the profit. First formula, which is income 130, 000 a year minus my ideal profit, which is 80, 000 a year is left over 50, 000. I have to run my business off 50, 000 a [00:17:00] year. Okay. No questions asked period. That's all I have. If that were done, which is possible, ~if that were done, ~we wouldn't be having this episode today.

Brian: So let this be a lesson to you. If you want to follow profit first, We have kind of an episode on that episode, two 53, you can go to six figure creative. com slash two, five, three on that episode.~ on that episode. ~The reason I want to recommend this is because I talk about profit first in general and automating that I talk about the bank account I use, which is one that I've used for the last year and a half now.

Brian: Absolutely love it. Still love it to this day.

Brian: And on the episode, I'll even link you out to ~the, ~a full video that breaks down the bank. ~I'm not going to send you that to yet to you. I'm not going to send that episode. ~I'm not going to send that link to you first because you need the context of automating the profit for a system first before that banking video makes sense, but, it's an awesome bank.

Brian: Highly recommend it. And it starts with episode 253. So if you want to check that out, just go to six figure creative. com slash two, five, three. That's all I got for you this week. I'll catch you next week on the six figure creative podcast. Bye.

Brian: ~Hey, you know what? Riverside brought Riverside brought labeling weirdly. Okay, cool.~