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Am I actually making money?
Most owners have never seen their profit with a proper wage for their own job in it. This puts one there, shows what it does to the margin, and then asks the second question that decides whether a business is comfortable or not: is there enough cash behind it to fund a bad month without the overdraft.
Real profit
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
Profitable on paper, on life support underneath.
There is something left after the owners are paid properly, but not enough to fund tax, debt and a cash buffer, let alone growth. Crabtree's word for this band is survival, and he does not mean it kindly.
Another $5,000 of pre-tax profit, at the same revenue, puts the business on 5 per cent.
The 5, 10 and 15 per cent lines are Greg Crabtree’s published guidance, not an Australian standard. What they rest on is set out below.
| Profit before tax, as reported | $210,000 |
|---|---|
| Add: owner pay already in the accountsBack out first, or the owners get charged twice. | +$90,000 |
| Less: what the role would cost to hireIncluding on-costs. This is the line the whole page turns on. | -$185,000 |
| Real profit before tax | $115,000 |
Reported margin
8.8%
What the accounts show.
Real margin
4.8%
After a market wage for the owners.
The difference
minus 95,000 dollars
-4.0 points of margin.
Core capital
Part of the way there
- Two months of operating costs
- $156,000
- Cash held, net of the line of credit
- $55,000
- Gap
- -$101,000
- Months of cover
- 0.7 months
There is a buffer and it is not yet two months. The gap is what stands between running the business and the line of credit running it.
The gap is 88%of a year’s real profit, before tax and before any principal repayments.
- The 5, 10 and 15 per cent lines are Greg Crabtree's, published on his own site as pre-tax profit after a market-based owner salary. They come from US client data whose sample has never been published, so treat them as a well-argued rule of thumb rather than an Australian standard. Your own trend matters more than the band you land in.
- Paying the owners at market rate takes the profit down, which means the business is currently being subsidised by whoever runs it. That difference is not profit. It is an unpaid wage, and a buyer or a credit team will normalise it out on day one.
- Cash in the account while the line of credit is drawn is not a buffer, it is borrowed money sitting still. Core capital here is one net of the other, which is why the held figure is lower than your bank balance.
Where the lines come from
Someone else’s numbers, and we will say whose.
The 5, 10 and 15 per cent lines are Greg Crabtree’s, from Simple Numbers and still published on his own site: 5 per cent a business on life support, 10 per cent the standard for financial health rather than a stretch, 15 per cent a robust position with room to invest. He measures them the same way this page does, as pre-tax profit after a market-based salary for the owner. The two-month core capital target is his as well, from asking company data sets what their deepest negative cash month looked like.
What they rest on is US client engagements, and the sample behind them has never been published. So they are drawn here with his name on them rather than presented as an Australian benchmark, and they are not this firm’s standard. Where this site does have Australian data it says so and links to it: the ATO benchmark check runs on figures drawn from real tax returns that you can download yourself.
Read a band as a rule of thumb worth arguing with. The two figures on this page that are unambiguously yours are the movement between the reported margin and the real one, and the gap between the cash you hold and two months of costs.
The method
Five lines, and the one that catches people out.
| Line | How it is worked out | Why it is there |
|---|---|---|
| Profit before tax | Straight off the profit and loss, before tax and before anything else is touched. | The starting point, and for most owners the only profit figure they ever see. |
| The owner pay add-back | Owner wages already in the accounts come back on, but only where they ran through the payroll. | Wages reduced the reported profit. Distributions did not. Adding back money that never left the profit line charges the owner for the role twice, which overstates real profit by the whole salary. |
| The market wage | What it would cost to hire someone to do the work the owners do, on-costs included, comes off. | The one line the page turns on. Until the job is priced, profit and unpaid owner time are mixed together in the same number. |
| The band | Real profit as a share of revenue, placed against the 5, 10 and 15 per cent lines, with the profit needed to reach the next one. | A percentage on its own does not tell you what to do. The dollar gap to the next line does. |
| Core capital | 2 months of operating expenses plus payroll, against cash held net of anything drawn on the line of credit. | Whether the business could fund its own worst month, or whether the overdraft would have to. Profit and cash answer differently, and both answers matter. |
Profit before tax
- How it is worked out
- Straight off the profit and loss, before tax and before anything else is touched.
- Why it is there
- The starting point, and for most owners the only profit figure they ever see.
The owner pay add-back
- How it is worked out
- Owner wages already in the accounts come back on, but only where they ran through the payroll.
- Why it is there
- Wages reduced the reported profit. Distributions did not. Adding back money that never left the profit line charges the owner for the role twice, which overstates real profit by the whole salary.
The market wage
- How it is worked out
- What it would cost to hire someone to do the work the owners do, on-costs included, comes off.
- Why it is there
- The one line the page turns on. Until the job is priced, profit and unpaid owner time are mixed together in the same number.
The band
- How it is worked out
- Real profit as a share of revenue, placed against the 5, 10 and 15 per cent lines, with the profit needed to reach the next one.
- Why it is there
- A percentage on its own does not tell you what to do. The dollar gap to the next line does.
Core capital
- How it is worked out
- 2 months of operating expenses plus payroll, against cash held net of anything drawn on the line of credit.
- Why it is there
- Whether the business could fund its own worst month, or whether the overdraft would have to. Profit and cash answer differently, and both answers matter.
A worked example
An 18 per cent business that is a 7 per cent business.
$1,450,000 of revenue and $265,000 of profit before tax. On paper that is an excellent year. The owner takes their money as distributions rather than wages, so nothing in those accounts pays for the job they do, and replacing them would cost $165,000. Nothing here is wrong with the business. It is just not the business the profit line describes.
Real, and not yet enough to fund the business.
The business pays its owners and clears a genuine profit. What it does not yet do comfortably is fund tax, principal repayments and a cash reserve out of the same profit, which is the sequence the money has to cover.
Another $45,000 of pre-tax profit, at the same revenue, puts the business on 10 per cent.
The 5, 10 and 15 per cent lines are Greg Crabtree’s published guidance, not an Australian standard. What they rest on is set out below.
| Profit before tax, as reported | $265,000 |
|---|---|
| Owner pay taken outside the profit and lossDistributions never reduced the reported profit, so there is nothing to add back. | $0 |
| Less: what the role would cost to hireIncluding on-costs. This is the line the whole page turns on. | -$165,000 |
| Real profit before tax | $100,000 |
Reported margin
18.3%
What the accounts show.
Real margin
6.9%
After a market wage for the role.
Core capital
Two months held
- Two months of operating costs
- $104,000
- Cash held, net of the line of credit
- $130,000
- Gap
- +$26,000
- Months of cover
- 2.5 months
The business can fund its own worst month without asking anyone. Cash above this point is available for distribution or for putting to work.
The cash side reads better than the profit side, which is common and worth noticing. This business holds 2.5 months of costs with nothing drawn on a line, so it can absorb a bad quarter. What it cannot yet do is fund much growth out of earnings once tax and any principal repayments come out of that $100,000.
Getting to the 10 per cent line needs $45,000 more profit at the same revenue. Which lever gets there is a different question, and there is a tool for it.
Which tool you want
This one and the adjusted EBITDA tool should disagree.
Both do something with the owner’s wage, and they pull in opposite directions on purpose. Adjusted EBITDA rebuilds the earnings the way a buyer or a credit team would: interest, depreciation and one-offs come back on, so someone else can see what the business generates before financing. The number goes up, and it is the number that gets lent or paid against.
This page puts a cost back in instead, so you can see what is genuinely left for you. The number usually goes down. Use the other one when someone else is assessing the business. Use this one when you are.
The adjusted EBITDA calculatorWhat this does not cover
- Tax of any kind. Nothing here computes a rate, a liability or an after-tax figure, and every profit number is before tax
- What your business is worth. There is no multiple on this page and no field that could carry one
- Whether your market salary figure is right, which is the input most worth checking against an actual job ad
- Seasonality, since one year of figures against a point-in-time cash position will flatter a business at the top of its cycle
- Return on the capital you have put in, which is a separate question to whether the trading is profitable
Know the gap. Now work out where it comes from.
The profit and cash levers calculator takes the shortfall this page just gave you and prices what closes it: a point on price, a point off the cost base, a week off the debtor book, and what each does to profit and to cash.
Want the finance arranged as well?
This site does the analysis and the documents, and does not arrange credit. The broking is done by The Lending Lab, a separate business run by the same person. Send a few details and Nick handles it himself.
Common questions
Because someone has to do the job, and if you stopped tomorrow you would have to pay them. Until that cost is in the numbers, the profit line is partly a measure of how much of your own time you are giving away. It is also exactly what a buyer or a credit team does to your accounts before they decide anything, so you may as well see the number they will see.
Yes, and it is the most common way this sum gets done wrong. Wages through the payroll are already a cost in the profit and loss, so they have to be added back before the market rate goes on, or you are charged for the role twice. Distributions, dividends and trust entitlements never touched the profit and loss, so there is nothing to add back and the market salary simply comes off. The tool asks which, rather than guessing.
Greg Crabtree, who wrote Simple Numbers, publishes them on his own site as pre-tax profit after a market-based owner salary: 5 per cent a business on life support, 10 per cent the standard for financial health, 15 per cent a robust position. They rest on his US client data and the sample has never been published, so we show them with his name attached rather than as an Australian benchmark. Use them as a well-argued rule of thumb. Your own movement year on year will tell you more.
No, and the two answers should disagree. Adjusted EBITDA rebuilds your earnings the way a buyer or a lender would, adding interest, depreciation and one-offs back so they can see what the business generates before financing. This one goes the other way and puts a cost back in, so you can see what is genuinely left for you. Use adjusted EBITDA when someone else is assessing the business. Use this one when you are.
Two months of operating expenses plus payroll, held in cash, with nothing drawn on the line of credit. It is also Crabtree's, from looking at the deepest negative cash month across company data sets. The point of the number is that the business funds its own worst month rather than the overdraft doing it. Cost of goods sold is left out, because you generally get terms on it.
Because money in the account while the line of credit is drawn is not a reserve, it is borrowed money sitting still. If you have $120,000 at the bank and $45,000 drawn, you hold $75,000. That is the figure that decides whether you could fund a bad month yourself.
No. Every figure on this page is before tax and there is nothing here that computes a rate or a liability, deliberately. Tax is your accountant's work, not ours, and the whole point of how this firm is set up is that we do not compete with the accountants who send us work.
Add both together. Put the combined pay currently running through the accounts in one line and the combined cost of replacing both roles in the other. If one of you works part-time in a role, use the part-time cost of that role rather than a full salary.
General information only. Indicative, and not taxation advice or a review of your tax position. Every figure on this page is before tax. The profit bands and the core capital target are Greg Crabtree's published guidance, cited on the page, and are not an Australian standard or a benchmark set by this firm.