My #1 business goal is to leverage my online media company to lead a better life. To do so, I need to maximize profits and minimize expenses since it’s my money at risk. For investor funded startups, it’s more about growth at any cost with less concern for profits because they are spending other people’s money. My plan is to never rely on anybody for money because one day funding may dry up.
My latest discovery on how to save on taxes and have a better time with my business comes from a social media software company called Buffer App. They’ve raised about $4M and are valued at roughly $40M based on their last round of funding. I’m thankful Buffer is completely open with their finances, because it allows other entrepreneurs to learn from their actions.
I’m excited many of you have decided to start your own websites this year. It almost feels like magic creating something from nothing doesn’t it? Once you start generating revenue, you’ve got to figure out how to best allocate resources. Let’s have a look at Buffer’s monthly P&L to see if we can learn something new.
Business Income And Expenses
* People are expensive. Salaries account for a whopping 65.6% of monthly expenses. With ~65 people on the payroll (they say 90 in one post, but only list 65 in their open salaries spreadsheet post), that averages to $3,445 a month or $41,342 a year per person. The figures are inline with the median income in America.
Managing people can be cumbersome. Ideally, you want the fewest people possible to generate the most amount of revenue. In Buffer’s case, the average revenue generated per employee is about $5,000 a month. Not bad, but not amazing.
* Profits are small. For a software company, having a 4.6% operating profit margin is very low compared to the industry standard of 20%+. Can you imagine spending over $300,000 a month to only make $15,666 in operating profits before tax? Or what about spending $10,000 a month to earn just $460 a month in operating profits? At least Buffer is profitable, unlike many other startups who will inevitably shut down.
Profits margins can be much higher with a lifestyle business. You can easily run your own website for less than $50 a month and generate $5,000 a month in operating profits for a 98% operating profit margin. Or you can pay yourself a $2,000 a month salary on $5,000 in revenue and $50 a month in website costs and earn a 58% operating profit margin. But the reality is, since you can distribute the remaining $2,900 in company operating profits to yourself, your personal operating profit margin is much higher.
* Buffer spends more on retreats than they make in profits. Spending $17,588 a month on retreats while making $15,666 a month in profits is why running your own business is impressive! As far as I know, Buffer App hasn’t been audited by the IRS or gotten into trouble with their finances. Given they are publicly showing the world all their finances, everything is probably legit. Therefore, Buffer’s financial moves may serve as a guide for other entrepreneurs.
There’s a running joke that says the reason why non-profits are unprofitable is because they pay their executives all of their profits. As a small business owner, you can either decide to make more profits and pay more taxes, or you can spend more of your revenue on you and your hard working employees. Buffer has clearly chosen the latter. They were planning to spend $400,000 on a company retreat to Berlin. That’s awesome!
* Lower taxable income. There are other random things in the spreadsheet such as The Tools We Use, Kindle Books & Culture, and Other which help lower Buffer’s monthly taxable profits by around $17,000. If we use a 30% effective tax rate, that’s a ~$5,100 tax savings. If they wanted, I’m sure Buffer could easily cut out over $30,000 in non-employee expenses each month. But why not pay less taxes and let all employees enjoy life more? Making $30,000 more in operating profits a month simply means a $9,000 higher monthly tax bill. Sure, they would get to retain $21,000 in earnings on their balance sheet. But it sounds like they already have enough money on their balance sheet.
* A hybrid business model. Buffer is stuck in the middle where they want to become a big business with venture funding, yet also want to be a lifestyle business as well. Given this hybrid, it may be hard for them to see an exit any time soon. They are spending a little too much on extraneous expenses IMO. With no exit, all you’ve got is your salary. Unfortunately, salaries are light for all – except the top employees – compared to the salaries for similar positions at larger firms. I think the management knows this, which is why there’s such an emphasis on work retreats and other fringe benefits. The latest news is that it looks like even these fringe benefits may be going away as they recently announced layoffs.
Build The Business You Want
Focusing on absolute dollar amounts is often misleading. Therefore, I recommend every entrepreneur look at their expenses as a percentage of total costs and revenue. ~5% of total revenue for work retreats seems reasonable. Alternatively, you could spend as much on work retreats as you make in operating profits, but that seems excessive. The only thing I’m amazed about with Buffer’s P&L is the 65%+ of revenue going to salaries. Even the much maligned finance industry doesn’t pay more than 50% of its revenue for salaries and bonuses.
Like Buffer, I’m going on a work retreat to Hawaii this summer. I’ve always wondered what is a reasonable amount of money to spend on business off-sites. Thanks to Buffer now I’ve got a better idea.
Here’s my estimated business budget:
Two Economy Plus roundtrip plane tickets to Honolulu from SF: $1,100
9 nights at The Kahala Hotel & Resort: $5,400
Food for 10 days for up to four people: $2,500
Team bonding activities: $2,000
Sample itinerary breakdown:
Day 1: Meet main FS editor for lunch at Ethel’s Grill in Kalihi to discuss how things are going. General catchup to make sure my editor is happy with his current duties and salary.
Day 2: Meet with editor to discuss editing efficiency. Attempt to go from old school editing to uploading my drafts in Google docs to streamline the editing process. Suggest editor skim posts first to understand overall message, and then get into the weeds.
Day 3: Meet with business partner to strategize on editorial calendar for 2H2016. Brainstorm a list of 60 post ideas to work on. Go to the farmer’s market and buy all the white pirie mangoes we can.
Day 4: Team building day. Spend the afternoon snorkeling in Hanauma Bay followed by jet skiing close by. Dinner at Alan Wong’s for four that evening.
Day 5: Review various business categories and compare month over month, quarter over quarter, and year over year trends. Come up with revenue forecasts for each business for 2H2016 and 2017. Decide which businesses to cut, and which businesses to emphasize in a downward trending economy.
Day 6: Strategy session to discuss community building. Have an open discussion on how to deal with angry commenters or spammers. Discuss new features to add such as an FS forum. Review social media initiatives and see whether time spent is worth it.
Day 7: Team building day. Spend the morning hiking up to Manoa Falls. Eat some poke at Fresh Catch and then hit the beach for some boogie boarding.
Day 8: Review YTD salary, operating profit, and revenue figures. Come up with overall targets for the year. Decide on whether to hire staff writers, virtual assistants, graphic designers and other freelancers to help with day-to-day operations or keep everything simple. Need to come up with a marketing budget.
Day 9: Dedicated day for writing posts, responding to comments on FS, and commenting on other posts by other publishers on their platforms. Dinner at 12th Avenue Grill.
Day 10: Publish a new post first thing in the morning. Review business retreat initiatives over breakfast. Get a final hour of tanning on the beach. Catch a 1pm flight and head back to San Francisco.
Many companies have work retreats. But not many companies are able to have a work retreat this long. Since I run an online media business, it doesn’t really matter how long I’m away so long as articles get published on schedule.
At the end of the day, it’s my money and time. Besides fun work retreats and better tax management, being able to control your schedule is the biggest benefit of being your own boss. Generating profits from your business won’t happen overnight. But if your direction is correct, sooner or later you’ll get there. In a future post, I’ll be writing about how to generate revenue for your online business.
Interested in starting your own website? Check out my step-by-step tutorial guide on how you can launch a site like mine in under 30 minutes for just $2.95/month. A website legitimizes your business and becomes your online portal. Not a day goes by where I’m not thankful for starting Financial Samurai in 2009. Everyone should leverage the internet to build a brand, build a business, and become untethered from an office to live freely!
Updated for 2020 and beyond.