1681: Make A Profit After Paying Yourself by Paula Pant of Afford Anything on Entrepreneurship Advice

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[00:01:00] This is Optimal Work Daily. Make a Profit After Paying Yourself by Paula Pant of AffordAnything.com The biggest mistake I've made as an entrepreneur? Confusing my role as an investor with my role as the general manager. As an investor, my role is to infuse money into a project or a company. Then I kick back and wait for the returns.

[00:01:24] As the general manager, my role is to oversee the daily grind. I send emails, make phone calls, conduct research, source supplies, and do a hundred other tasks that amount to the nuts and bolts of the daily drudgery. In many entrepreneurial ventures, it's common to wear many hats, to be both the investor and the employee. In doing so, it's easy to confuse profit with paycheck. You don't work for the stocks you own.

[00:01:51] If I bought stock in Coca-Cola, I wouldn't be expected to renovate the Coke bottling factory, drive to the delivery warehouse when an order gets shipped, or design the next Coke commercial. As an investor, that's not my job. My job is to raise the capital, accept the risk, and collect the return. If I designed the next Coke commercial or drove to the warehouse to oversee the shipping, I'd demand to be paid for my work, regardless of whether or not I also invest in the company. Why should running your own business be any different?

[00:02:22] Recently, I've come to realize that within my real estate activities, I've been confusing my role as an investor with my job as the project manager. Many real estate investors, including me, think we can make a bigger return by doing the work ourselves. That means we're performing hours of tasks, valuing that labor at $0, and then proclaiming, hey look, I just made a 10% return. Newsflash, that's not making a return. That's taking on a second job, often a poorly paying one.

[00:02:52] Pay yourself. As a business owner, my role is to say, I need to hire someone at X dollars an hour, and their tasks will be, If I'm strapped for cash, I'll hire myself. If I've got money to invest, I'll hire a more qualified candidate. But I shouldn't confuse my paycheck with my profit. Those are distinct payments made for distinct contributions. I've been making that mistake within my real estate investing projects.

[00:03:17] My recent decision to start delegating work, rather than doing everything myself, brought that reality to light. When you have to put a monetary value on labor costs, the true profit margins come into sharp focus. Profit vs. Paycheck About a year ago, I wrote a blog post called The Biggest Mistake Small Business Owners Make. In that post, I describe how small business owners often confuse making a profit with earning a living.

[00:03:43] I illustrate this with a hypothetical scenario about a freelance writer named Sally. Sally subtracts her expenses from her income of $55,000 and reasons that her business made a pre-tax profit of $44,608. Right? Wrong. $44,608 isn't the profit her business made, it's simply money left over to pay herself a salary.

[00:04:07] Let's imagine Sally had an assistant who earned $25,000 a year doing research for Sally's stories. Sally would deduct that research assistant's pay as an expense before calculating her profits, right? So why doesn't she value her own time? In other words, I can't value my time at $0, value someone else's time at a rate that's greater than $0, and make an apples-to-apples comparison between the two. When I wrote that post, one reader left a comment saying,

[00:04:48] Yep, that's part of the problem. Our tax code reinforces the idea that your time is worth nothing if you do it yourself. Don't take business lessons from the IRS. Your biz may not be profitable yet, and that's okay. That being said, very few businesses are profitable in their first few years, and that's okay. This website makes a profit in comparison to the money that I've invested into the hosting and design,

[00:05:15] but this website is wildly unprofitable in comparison to the cost of hiring someone to write content and manage the marketing. I've created a job, no doubt about it, but after I pay the writer a fair wage, there's no profit left over. And that's okay, because the website is only a year old, and I don't expect it to make a profit after paying the writer's fees within the first year. Heck, I don't expect a profit in year two either. Year three, maybe. Let's hope. The bottom line?

[00:05:45] No matter what business you're running, whether you're a blogger, house flipper, freelance writer, cookie baker, or puppy daycare owner, remember that your goal is to make a profit after paying all the employees, including yourself. You just listened to the post titled, Make a Profit After Paying Yourself by Paula Pant of AffordAnything.com. And a big thank you to Paula.

[00:06:12] Again, she is typically narrated over on Optimal Finance Daily, so to hear a lot more from her, you should definitely check out that show. A little bit about Paula, she is a podcast host, writer, speaker, and media commentator on financial independence and real estate investing. Her site, AffordAnything, draws 2.5 million annual page views and holds more than 60,000 email subscribers. She is well-traveled.

[00:06:37] She's been to more than 40 countries and speaks at multiple conferences every year, including a keynote address at the World Domination Summit. And she also delivered a talk at Google at the company's Los Angeles office. So, come by AffordAnything.com to learn a lot more about Paula Pant. You can find her blog, podcast, and community all right there on that site. And thanks so much to Paula for letting us share her work. But that's going to do it for today here on the show. Hope you have a great rest of your day as we head toward the weekend.

[00:07:07] And I will be right back here with you tomorrow in the Friday show. And that's where your optimal life awaits. Hope you have a great rest of your day.