Building a Business

How to Build a $1 Million Business | Part 1 | Why $1 Million?

Joe Collins, CPA, CA
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April 12, 2022
Why is a $1 Million business the sweet spot for building wealth and balancing your lifestyle? In this article, we’ll break down the different types of businesses and some of the pitfalls that come with each one. We’ll then explain why a $1 million business is such a sweet spot for a business as both a finishing goal or a launching pad for an even larger business.

Alright, so let’s get into the different types of businesses, but before we do let’s make a few things clear:

  1. Although there are pitfalls with any size of business, one type of business still might work for you.
  2. No judgment! If you find a certain stage comfortable for you, stick with it. Knowing the pitfalls can help you mitigate them.
  3. Nothing is set in stone. Just because your business looks a certain way now doesn’t mean that you can’t take it in a different direction later.

Setting the Stage

Every business, no matter its size or stage, looks about the same. What I mean by this is that it doesn’t matter whether your revenue is $10,000 or $10,000,000, there are certain functions that every business needs to cover. This is a key point that many business owners miss and can really hold them back from building a more sustainable business.

These functions are:

  1. Strategy: Whether you are intentional about it or not, your business will still have values and will represent certain things to people on the outside.
  2. Sales and Marketing: If you are in business, you will have some variation of sales and marketing activities. Whether you do them consistently or well is another matter, but every business needs these functions.
  3. Operations: The way you deliver your products or services may change as your business grows, but the fundamentals are the same. These operations may be in your head or written down, but they exist regardless.
  4. Human Resources: Even if you are a solo entrepreneur, you are engaged in Human Resources. After all, you are deciding how to treat yourself. 
  5. Finance and Administration: No matter your company’s size, you are required to file and pay your taxes, keep track of what you’re spending and what money you’ve received, register for licenses, buy insurance, etc.

The fact is that there are table stakes to running a business of any size. These table stakes can come in the form of money or time spent on these required activities. Successful business owners of any size understand that their life will be much better if they can outsource at least some of these activities and create good processes for the others.

What Are The Different Types of Small Businesses?

Small businesses can generally be characterized as any business with under $1 million in revenue.  If you are flying solo and working for yourself, or running a business with salaried employees making close to a million, you’re technically in the same category.   Not sure where you stand, or where you want to grow to?  Here’s a little breakdown of the types of ‘small’ businesses:

The Freelancer

A business .. without employees

The freelancer is usually a technical expert that is tired of having a boss. They strike out on their own so they can charge an intermediate rate and not let anyone make money off their back any longer.  What freelancers will inevitably need to decide is do they want to grow?  

Do you want to grow to the point where you’re no longer required to do everything? Or do you prefer it this way - being in control, and not having to answer to anyone (or anyone answer to you)!

What many freelancers face in their first years in business is that it is really hard to say no to work. You can never fully be confident where the next project might come from, which can cause added stress that either is exciting and part of the thrill, or exhausting and not worthwhile after a certain point. They also get bogged down in the administration that comes from being out on their own. They realize their taxes are more complicated, they have to send out invoices and it can be hard to keep up with all the paperwork.

As the work comes in, they realize there are only certain types of work that they are really good at, but clients expect them to do it all. They may subcontract a few items in the list from time to time as a stop gap, but that can only take you far as.  As a freelancer, it’s important to get specific about what it is that you enjoy doing, and do well, and stay as close to that work as possible.  The more you stray for clients, the more stressful the freelancer life can become.  With that being said, for those who love the boss free life, being a freelancer can be just the ticket!

The Micro-Business

A business with a couple of employees, with less that $250K in revenue

A great example of a micro business would be a coffee shop or small bakery that has 2 or 3 employees.  You can have a thriving business, with employees who depend on you, but you still are putting in 100% of your blood, sweat and tears on a daily basis into the business.  There are huge perks to having a micro business.  You have a few employees to help take some of the burden off of your shoulders, you can make a comfortable living for yourself, and you can find pride in what you’ve created, by both creating something for your community, and providing stable income to people as well. 

The challenge with micro businesses is that it requires near 100% of your attention everyday.  It’s almost impossible to take a day off, and definitely near impossible to take a vacation (or a stress free vacation at least) because your business depends on you being there everyday to survive.  

With that being said, if you love what you do, and you have surrounded yourself with a great team, then a micro business can be a sweet spot.  You work for yourself in an area you are passionate about, and you get to help others along the way, not bad huh!?  If you’re looking to remain that size, you have to be disciplined with your finances to ensure that you are able to pay yourself well enough, and still have enough to maintain the business.  If you’re interested in growing, a strong and focused strategy for growth can help bump you up into our next category of business.

The Small Business 

A business making between $250K to $1.5 million in revenue

This is the real sweet spot for a business owner. The business can pay you while you’re not around, and finally, you can go on a vacation without the business falling apart.  There are internal people who hold some responsibility, and can operate the business on their own without you constantly around.  

At about $1 million, you can hire out these positions and still be profitable. As you build out your org chart, you will have freed yourself up to pay yourself a salary plus any profits from the business. Doing this all while minimizing your daily efforts in the operation itself.

At this point, you will be able to have production, sales and marketing, and admin staff covered by your overhead. This allows your business the opportunity to function well, and become scalable.  

Looking at our breakdown of a $1 Million Dollar Service Based Business guide (LINK HERE) you can see that you will now have some budget to spend the dollars on what you need to to grow.

Getting to this point does take time, as it’s important to create strong processes and procedures to ensure that if people leave, someone new can slot in with minimal training and disruption.  Creating strong solid internal procedures also helps to keep employees happy, limits turnover, and generally helps to create a stronger business.

There are huge positives to getting your business to this stage:

  1. You get your time back: you can actually build it so that you can leave the business alone for weeks at a time, it has value to an outside buyer, and produces cash flow without you.
  2. You are consistently profitable: you are no longer going month to month hoping to be in the green, and you are now at the point of consistent profitability (isn’t that kind of the point?) in addition to paying you a salary.  You get paid for your ownership in the business and all of the hard work you put in to grow the business. 
  3. You have more time for your purpose: you now have some extra time, and you can start giving back to the community because you are profitable, and you get to see your vision come to life.
  4. You can get here without outside investment: Growth is expensive and fast growth is most expensivest. If you are growing larger or very quickly, you might be forced to take on investment, which means giving up a portion of your company. What’s the point of owning a business if you have people to answer to?

This sounds great right!? Why doesn’t everyone want to get to this point?  

Well, it’s hard work.  

Life is already hard - but this requires really leveling up. Everyone is working hard at every level of their business, but this stage is the time where you now need to work smarter to build a business that will sustain itself completely free of you. 

Building value into the business, all while having the emotional stress of having people depend on you for their pay cheque every month is no joke.  It’s tough for sure, but there is one thing that will help. Literally, get help! 

You have to be willing to lean into hiring, lean into having others do the work for you, especially in areas of the business that aren’t your strong suit.  We will talk about how to mitigate the hard stuff, and how to address these issues and overcome them to grow in more detail later in the series, so stay tuned! 

What’s next? You might be wondering what happens beyond the $1 million dollar mark.  That’s where we’re currently at, so we’ll report back when we’ve figured it out!  If you’re reading this, you are likely before the $1 million mark, and your goal should be to grow to $1 million, in a sustainable fashion before moving to the next stage.

The way we will discuss growth in the coming episodes is really geared towards owner managed businesses, and for owners looking to keep control of their company, and to be in control of the growth without external funding. 

Funding MATTERS. If you’re a high growth company blowing past a million quickly, this might not apply to you.  Ready to grow?  Here’s what the next stage could look like for you.

The Medium Sized Business 

$1.5 million to $5 million in revenue

Growing beyond a small business is really hard work, but it is totally possible. To grow beyond $1.5 or $2 million, it really comes down to a whole other new leap of faith.  That is where we currently are as a company (that might be a series for another time .. the things I’ve learned!) 

At this level, you need to create a whole new layer of management to run the business for you, and as an owner of the business, you have to rely on the procedures you have built, and as they inevitably break down as you grow (trust us, it happens) you and your management team need to be cognizant and work diligently to build them back up again.  One of the toughest parts of this level of growth is accepting that new systems need to be built, and actively breaking down some of the systems that served you for so long can be tough, but it’s necessary.

What's the Right Size For You?

Although you can probably tell we are huge advocates of the $1 Million business, it's not one-size-fits-all. The point is that no matter what, you want to grow your business with intention. In our next instalment we look at this very thing: your strategy.

As you grow and adapt, you constantly need to be looking at your core, and making decisions based on those principles. You need to fall back on your ‘why’ - your values, mission and vision. That will be your compass and your guiding light.

Ready to pinpoint your why? Stay tuned for our next episode in the series - What Is Your Why.

Interested in working together? Let's chat. Curious what the financials should look like at $1 Million, check out our guide.

Article by
Joe Collins, CPA, CA
.
Originally published
April 12, 2022
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