If you are new the world of entrepreneurship, you are likely searching for some proof of concept.
“How do I know this is gonna work?” you ask yourself on those late nights hunched behind a monitor or on those early mornings when you hit the phone and start cold calling prospects.
This early time in an entrepreneur's career is both exhilarating and exhausting, and thoughts of failure always linger in the back of your brain.
Thankfully, successful entrepreneurs have left behind countless roadmaps and templates that you can follow and use to achieve a taste of success. Often, these roadmaps come in the form of income reports.
I'm here to tell you to ignore them completely. Or at least take each one with a grain of salt. Here are three reasons why.
They Often Only Report Topline Revenue
Tell me if this is familiar, new entrepreneur…
You are looking for inspiration when you come across a podcast with somebody who “Made $300,000 in Their FIRST Year of Business”. You immediately feel deflated and think, “I've only made $xx,000 (or $x,000) and I'm already x (or xx) months into this.”
This is a normal reaction, but it is not helpful and it does not necessarily reflect reality. The one “unspoken” fact that changes the whole story is that the $300,000 in those income reports is revenue, not profit.
If this revenue is coming from a physical product business, expect margins to be around 20-40 percent of gross profit. Not bad, but $60k in year one (at 20 percent) certainly doesn't impress in quite the same way as $300k does.
And just as you don't know the profit margins of this business, you have no idea how tax-optimized this particular person's business is or isn't. Which brings me to my next point:
You Don't Know the Particulars of That Person's Financial Burden
Would you rather “earn” $200,000 a year or $100,000 a year? 200k, right?
Well, what if that 200k annually required you to:
- Live in San Francisco, one of the world's most expensive cities
- Earn that money through an LLC (not a tax-optimized structure)
- Pay federal, state, and self-employment tax
Compare this with your other offer of $100k a year, which:
- Is location independent and allows you to live in any city you choose, including ones like Berlin, Lisbon, and Mexico City, where you can have a great quality of life for under $2k USD a month.
- Will exempt you from paying income tax on your first ~$100k of earnings due to the Foreign Earned Income Exclusion
- Is set up as an S-Corp, thereby allowing you to avoid a 15 percent self-employment tax
Without a deep dive into the numbers and a phone call with a qualified tax-consultant I can't say definitively which is the better offer from a financial perspective, but you get my point.
Reality Isn't Always What It Seems
Just as you rarely know the particulars of a person's financial setup, you don't know the particulars of their life situation either. While those boastful income reports might get you feeling starry-eyed pangs of jealousy as you read them, take a step back and remind yourself that:
- You don't know how happy this person is or isn't
- You don't know whether they are in good health or poor
- You don't know how hard they work for their money. Do they manage a software company that earns them a mostly passive $200,000 a year, or are they grinding 70 hours a week on a 10 percent margin physical product business netting them $500,000 in topline revenue?
You simply just don't know. So stop comparing your internal world to their external world, which is carefully crafted to project the image of success.
Financials only tell part of the story, and in the scheme of life, it's an important but relatively small part. No set of numbers, no matter how sexy they may seem, tells the whole story. Remember this next time you pick up one of those income reports.