Life Beyond the Profit & Loss Statement – Do You Know Your Lifestyle Ratios?

Each month, you may anxiously await the reports that provide the numbers that help you manage your business.  Revenue, net income, total expenses, and payroll costs are just a few of the items that you may be monitoring on your profit and loss statement.  Those numbers will help you meet and improve your business goals, but the question is, what numbers are you using to determine if you are meeting your life goals?

It might be fun to come up with a few lifestyle ratios to help you measure and move toward your personal goals.  Here are a few for your consideration:

Passive vs. Active Income

If you’d like to work less as time goes by, then you’ll want to create your passive vs. active income ratio.  Make a list of all of your sources of income (not just business) in a spreadsheet.  You might have interest income, rental income, and investment income along with your business income or salary.

Then write down how many hours you spend working to earn each type of income.  For interest income, it is likely to be very little.  Investment income will only include the time you take selecting your investments and managing your portfolio. If you are active in your business, this will be the lion’s share.

Income is passive if you spend almost no time earning it.  Income is active if you spend time earning it.  (These definitions correlate to your time spent, not the IRS definitions.) Put the income in the appropriate column, passive or active.  You can allocate if necessary.

In the example below, this person is well on their way to retiring.  They also might question why they are spending so many hours working so hard for a fraction of their monthly income!

	Income	Monthly Hours	Passive	Active
Interest Income	$5,000	0	$5,000
Rental Income	$6,000	2	$6,000
Investment Income	$20,000	1	$20,000
Business Income	$10,000	167		$10,000
Totals	$41,000	170	$31,000	$10,000
Passive/Active ratio			76%	24%

 

The “aha” comes when you see the numbers.  The numbers often drive people to action.  You might decide to be more intentional about moving your income to passive sources so you can do the things you want to do.

Leveraged vs. Unleveraged Revenue

Leveraging your business revenue is a way to work less while making more money.

Measuring leverage is business-specific.  Examples of revenue that are not leveraged include seeing clients one at a time and selling hours-for-dollars services without a staff.  Revenues that are partially leveraged include group programs such as classes and events like webinars and conferences as well as hourly consulting that your staff performs with your limited oversight.  And revenue that is fully leveraged includes product sales.  Once the product is developed, it takes little incremental time to sell (unless you’re in retail).

Here’s an example, assuming this business owner has a staff of five people.  Both hourly consulting and training classes are partially leveraged because the business owner spends time teaching, consulting, and supervising.

	Revenue	Leveraged	Unleveraged
Book sales	$500,000	$500,000
Hourly consulting	$3,000,000	$2,500,000	$500,000
Training classes	$2,500,000	$1,500,000	$1,000,000
Total	$6,000,000	$4,500,000	$1,500,000
Ratio		75%	25%

 

If your revenue streams are flexible, you can work on moving more of your business income over to the leveraged side.  To create more leverage in the example business, the owner could sell or develop more products, hire another teacher, hire an additional consultant, and/or hire someone to review the consulting work of the employees.

Days Off vs. Days Worked

This ratio measures how much time we are able to spend away from the office.  It’s simple to compute, and you can estimate it if you don’t track your time.

Assuming a 5-day work week, there are about 250 working days in a year, not including about 10 holidays.  Estimate the numbers of days you were off, and divide by 250.  For example, if you took 5 1-week vacations from work last year, that would be 25 days, resulting in 10%.  This assumes you worked the rest of the year.

Your Lifestyle Goals

What’s on your “bucket list?” (This is a list of things you want to do in your lifetime before you die.)  Figure out the metric that will get you thinking about doing your dreams sooner rather than later.

You can have fun with metrics and ratios in and out of your business.  Here are some more ideas to think about:

• The number of customers you have that really fit your ideal client and how many more you need to go.
• How many countries (or states) you want to visit each year vs. how many you’ve already visited.
• How many volunteer hours or dollars you spend vs. how much more you like to.

When you put your goals into numbers and on paper, they seem more real and achievable.  You can get an “aha” just by computing these ratios.  Hopefully, life beyond the profit and loss statement will get you closer to your dream life.