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After Business Costs you need to make a Wage

Here is a simple question for the small business owner: What wage does the business need to provide as an annual income?

Or, reframed, how much money needs to be made as a wage after all fixed and variable business costs are deducted? This simple question is a good place to start thinking about the viability of a business model and how a business competes.

In a perfect World I’d suggest that after all fixed and variable costs are accounted for in a business there should be money to pay the owner.

In Australia for 2014 the poverty line for a single person was $400 per week ($20,800 per year) and for a couple with two children the poverty line rises to $841 per week ($43,732). This is 50 per cent of the Median Income.

One third of people below the poverty line take their main income from wages. These are the working poor.

In contrast, the Australian average weekly total earnings for 2014 were $1,516.90 ($78,878 per year). That is to say, if a small business operator wants to assess the income provided by their business venture as a benchmark against wages in Australia then this is probably the number worth aspiring towards. Aside from the classic lifestyle trade-off of self-employment, the goal should be to eventually (touch wood) make the average Australian wage after business costs.

Note that business costs include all fixed costs and variable costs, plus all money that needs to be returned to the business for expansion and the little bit of fat to get over occasional humps and roundabouts within the annual business cycle. These keep you in business. The wage is there to feed, educate and secure your family against an imminent threat of poverty.

That means if an owner adds all these figures together the resulting sum is roughly how much business they need walking through the door every week. If the business is to close for two weeks a year then this number needs to be adjusted accordingly. It’s that simple. All business costs (and I mean ALL business costs) PLUS $1,516.90 per week equals a business that provides the average full-time working wage.

Now, rather than looking at these numbers and thinking “Fuck I’m failing” … think of how the business model can be mixed up a little. Can the business disintermediate any part of the supply chain? Can the business move into an online solution and manage distribution, rather than support expensive shop infrastructure and rent? Are competitors taking the accepted standard business model for granted, providing an opportunity to fundamentally uproot and remove those advantages?

Just remember never compete on price. Stick to competing on features, quality, service, relationships and customer value.

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark and I live in the Derwent Valley in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a mazer & a yeast farmer (making beer, fruit wine and mead as by-products of continuous improvement in my farming practices). I'm a photographer, although my film cameras are currently silent. I do not tolerate idiots. I do not tolerate bigotry. I do not tolerate excuses. Let's be clear, if you sit with my enemies you my are my enemy for life.

Blogger. Thinker. Brewer. Drinker. Life partner to the amazing and incredible Megan.

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