Do you have the desire to start or grow a successful business? In this series Clay Clark sits down with Thrive15 winner Julie Nguyen and teaches her the fundamentals of starting a business, as well as the skills and tools necessary for a business to thrive.Sign Up to Watch
-Well what happens is then I go to hire my employee. So now to grow, I've got to hire an employee. So step one is I have this package up here. Step two is now I'm DJing all the time. Now step three, I have to hire an employee. Well then I started thinking, well, if I want to hire an employee, how much should you pay the guy? If he's going to be a good DJ, how much do you need to pay a guy who's really entertaining, really fun, really--
I started figuring out I'm going to have to pay the guy at least, a typical night, maybe $150, $200 bucks every night. Well, I'm doing the math and I pay the DJ $200, let's say, or $150. Something like that. So that's the pay. Well now I only have a left like $125 profit. And homey got to keep his own tip. And so now I have to use the $125 to go out and buy DJ systems. And I realize this guy would have to DJ a minimum of 52 times just to buy the gear, which by the time I ended up paying for it, it was broken because he had DJed for a year with it.
And so every time I hired a guy-- so as I grew from one DJ to ultimately where I had 40 DJs, I actually didn't make any more than $2,100 a week, even though I had 40 people and I was working to so often. That's what we can do.
-But now if I could do it all over again, this is what I would have done. I would have gone in and I would have said, all right. This is what I did later after someone worked with me. Come back in and I say, now I'm going to DJ for $625 a show. And if people can't afford it, I don't care. Because you know what? I've got to bring in that much revenue. And then I'm going to go and pay this DJ $150 pay. My profit after paying the guy, I'm going to have $400 of profit after doing this show.
But really it's not profit because I have to pay for equipment and breakage and whatever. So I'll put minus $200 for ads, equipment, stuff that breaks, office, whatever. And now I end up making a profit of roughly, take my $400, I end up making $200 an event. So $200 times my 52. I end up making for the year off each system a profit of like $10,000 per system. So now I take 40 DJs times $10,000 and I go, if I keep all those homies busy per week, I can make-- I add it up. $40,000, do you make an annual profit of $400,000 per year.
So that ends up being the per year deal. And I grew. So how are we going to fix your business? What we need to do, and does it make sense to you?
CLAY CLARK: I didn't factor in paying people, and I didn't factor in office and stuff and all that. So what we're going to do is we're going to make this pie chart. And this might be one of those things you might want to draw on your paper and then I'll-- and this is how we're going to figure it out. It's going to be really easy for us and then we'll get more complicated as your business grows. So here we go. So this is Julie. So we have to figure out how much are we going to pay labor per hour to work on your products?
Because somebody ultimately is going to have to order the stuff from China, or ship it, or make it, or put it in a box. Someone's going to have to do work other than you.
JULIE: Right Very right.
-So I don't know what the livable wage is in Las Vegas, I mean, livable. So you're not dealing with just like people who got some issues. You want to deal with a certain quality of individual. So you probably need to pay them a certain amount. What is that your mind? Roughly. You can change it later.
-Say $14, $15 an hour.
-So almost like a Starbucks Barista in Vegas sort of thing, right?
-So we're going to pay our labor $15 per hour. Then office. I have no idea how much office space costs in Las Vegas. I don't know. But I do know that you're going to have to factor it in. And so what we could say is that you're going to have a lease of, let's say it was $5,000 a month to lease an office warehouse or something. And if you divided that by 30 days, 50-- let's do-- my calculator. But 50. Say it's $5,000 a month, divided by 30 days.
So we need to have $166 bucks a day lease.
[THEME MUSIC] STUDENT: Break it down. Break-- break it down. -Then, we want to pay you. And I don't really want to pay you, but I'm just making up something for right now. I'm going to say 50% of profit is what we want to pay you. And then, we're going to have to pay for our website. And I don't know how much the website's going to cost. But I'm going to throw it out there, I'm just going to [GROWL]. I don't know. I try to break it down to like a per day? I'm going to say you're going to spend, every month, let's say you're going to spend $500 a month. And then we're going to divide that by, I think it should be 16. So I'll say $500 divided by 30. Boom. I'm going to say he's going to pays $18.50, OK? Now under that model, we're just going to work off of that. And again, it's your own business. So I'm not going to have you get into all the details. But I'm just going to make up numbers, to kind of help us. So we go through and say, well, how much did it cost us? I'm going to make up an example. You don't have to actually answer it. We're going to make a spreadsheet of all this. It's going to be awesome. But what we'll do is we say, so my income over here is $18.50. This is my income. And then my expenses are going to be, on that order, at least $7.25 for the materials. I'm just making it up. Maybe it's true, maybe it's not. But for materials, all right? STUDENT: OK. -Now how much labor goes into that? How many hours of labor? -One minute. INSTRUCTOR: OK. So let's just say that it's one minute. So it's not $15. It's $1 of labor, OK? STUDENT: OK. -I'm just throwing that out there, $1 of labor. Then we say, all right, so I'm just going through my checklist here. So we got labor, buh-boom, buh-boom, office. Well you're still going to have the office. Even if you don't sell anything, you're still have the office. So we've got to figure out, how much on every transaction is the office costing us? Or is it doesn't make sense to factor it in that way? Because it just doesn't make sense. So what you do is you have, this is called a variable expense. And if you know all this stuff, I apologize, but I don't to be patronizing. But this is called variable cost, OK? That means that every transaction, this is going to be different, sort of. Over here though, this is going to be your fixed costs. And your fixed costs is going to be your lease, right? So fixed cost-- STUDENT: Insurance, site-- -Mhm. So insurance, boom. Website. All right? -Now would labor fall under a fixed or variable? -I'm a huge variable cost person-- huge. Underline it, underscore it, I put stars by it. I put highlights on it. Do whatever you need to do. I would put it up on your mirror. This is like a huge point for small business owners. And this might make our fabulous president irritated, but that's OK. But here's the thing, is small business owner-- I have a buddy of mine, who we built a multimillion dollar franchise, unbelievably successful. He's about my age, unbelievably successful. Imagine we came to work for the guy, and he says here's the deal. Julia, we're going to sell the hell out of franchises. And you say, well how many have you sold? Well, zero. But here's the deal. If I sell a franchise, I'm a sell it to you for $40,000. You get to keep half of the commission. And so the new employee's like, you mean I get to make 20 Gs on one deal? And he's like, yeah. They're like, how many have we don't again? Zero. OK. But somebody worked it for $0 an hour. And then once they sold something, they got these massive commissions. Well he couldn't afford to make payroll of everybody was making hourly. And then he told the guy actually directly delivering the service. He says, hey, if you deliver the service, and we're going to charge the customer $100 for this service, every time that we deliver the service, the technician, I'm going to give you 50% commission. So the guy's like, you mean I can make $50 an hour if I'm hustling? He's like, yeah. He said, but what if I don't have any clients? He's like, go door to door, pass out our door hangers, and generate your own business. So he started his whole business off of variable pay. And almost every small business owner I've ever met, who has started from scratch, has some sort of variable costing, where they pay their people based off of how their performance. If you read a bunch of business books about it, this is what they call the merit-based pay. But I would totally avoid like the plague, whatever you have to do to stay away from just fixed labor costs at first. Now as you get bigger, you want to do fixed labor costs. Because you don't want to be paying your warehouse employees $2 million bucks a year, because you're shipping a bunch of stuff. I mean maybe you do, but you got to find that balance.
-Then packaging, you're saying packaging is-- how much are we going to spend on the actual packaging, if we're going to make world class packaging? -Packaging and the packaging includes-- actually for world class packaging, I don't know. But that packaging number includes the shipping cost. -OK, so right here, it's already here. -Yeah. -Ok, so I'm going to put it here. So it's that $3 for shipping and handling. Cool? -OK. -Boom. -Well, what do you have? Packaging's right here. So at the end of the day, we're going to take-- I'm just a math wizard with this calculator here. OK, let's see here. So I'm going to take 18.50 minus 7.75 minus $1 minus 3. Boom. So my profit is $6.75. Does that sound real? -Mm-hmm. -OK, that's my profit. Oh, yeah. So now I'm going to get rid of this. I'm going to try to merge this together. So now we have to say, our release for the month is 5,000. Our insurance is 500. Our website is 500. Oh, baby. So 6,000 is our costs, and 675 is our profit. So how many deals do we have to do to break even? -Roughly $1,000. -Yeah, so break even point equals 1,000 deals. However, after that, whoa. So that means if you did 1,000 deals this month, how would you make? Zero. -Right -But what if you did 2,000 deals this month? -Then I'd make about 6,000. -Yeah. -Which 50% of that would be mine. -Yeah, because we'd take the other half, roll it back into new products, whatever we want to do. Maybe we don't though. Maybe it all is going to be-- we've already factored it in right here. So maybe you don't spend it on advertising. But this would be your profit for the month, would be 6,750. So what we now have to do is-- I want Marshall to record all this. And Marshall, we're going to leave her with one document here-- it says fixed costs-- and another document over here that is your variable costing. Cool? And then this is your break even point. Is that making sense? -Yes. -So what you're going to want to do-- and this is going to be unbelievably time consuming, but I know you can do it. And you have to it. For every single item you carry, you want to have at least a rough idea of this. -Get a variable. -At least for every-- every item at least. Now how many items do you carry? -677. -Yep, so you might have to like develop rules where you're just like hey, I'm not even going to carry something unless it's this much of a profit or more, or whatever. But you'd really need to know. Because here's an example of what you can't do. This is bad. So Marshall, homework that we want to have for her today before she goes. If you want take a picture of this on your phone, Marshall, if they'd be best way, pretty good. -OK. -But I'm going to tell you an example of a sad, sad story of a sad, sad person that I know. This person's in the medical business. And he never did this, and he never did this. So he's working-- and I'm not exaggerating. He's probably working 70 hours a week after having gone to college for eight years. And we sit down, and he's like, I'm just not getting ahead. And I'm like, did you ever do phew, phew? We found out that with his payroll, even if he worked 80 hours a week, he would lose about $1,000 per week. -Wow. -Even if he saw-- because his numbers were all jacked. So how do we fix it? I said, you're going to have to fire one out of three employees, or lay them off, or something, at least one out of three. He's like, one out of three-- listen. You're a doctor, and you can only-- you're way over staffed. And he's like, but I want to offer this kind of care. And I'm like, or you're going to have to raise your prices tremendously. Now, I'm just going to say with you this is some stuff we could do. If people love the heck out of your product-- I mean, if they go man, she's the boss. If we send them awesome packaging, maybe on your first order, if it's possible, maybe we charge this. But maybe on subsequent orders, maybe it's 22.50. Maybe it's just $4 more. The first one's cheaper. But then after that, maybe it's more. A lot of companies do that.
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