When my son was eleven years old, I had a conversation with him about accountability. I was telling him that in economics, everyone must carry their weight and pay for their own way in the world. He was drinking milk and eating toast while I was practically ranting to him about the state of the world. When I started arguing that it was not fair for over-performing assets to subsidize underperforming assets and non-performing liabilities, he put his mug down and exclaimed, “I should stop drinking this milk then.”
Lost in my train of thought, I asked him, “Why? Are you full?”
He replied, “No, but how do you justify feeding me this milk when technically, I am an underperforming asset or probably a liability of some sort.”
“Well, it is my job to feed you.” I remarked slightly exasperated at this new line of questioning. He smiled cleverly.
“Exactly,” he said, “the government has a responsibility to take care of people who can’t take care of themselves, just like you paid for the milk that is in my cup right now.”
That day, the student surpassed the teacher and my son taught me a very important lesson of economics. This principle translates into business because as you count your underperforming assets and your non-performing liabilities -- which you have an obligation to fund -- you must understand that not funding them will have dire consequences for your company. That is what it means to consider your cost of breathing (COB). Cost of breathing, in a nutshell, is the cost of running your business over a period of time, whether it is per day, per week, per month, per quarter, or per year at zero revenue.
COB is not a technical accounting principle, it is the baseline out-of-pocket expenses at zero revenue. It is your overhead expenses. Sometimes you will hear a businessman say “Monday, Tuesday and Wednesday, I work for IRS. Thursday and Friday morning, I work for my staff. Friday afternoon, I work to keep the lights on. Everything I do on Saturday and Sunday is money I can take home. THAT is what I mean by cost of breathing.
At Elaunchers, my wife and CFO, Dipa, comes to me on the 25th of every month. She says, “next month, we will need an additional $XXX above and beyond our normal monthly anticipated cash flow.” This is an ultimatum for the company because it is a “you better bring me this money or else!” The “or else” can get ugly. “Or else” means I won’t be able to pay the credit card bill. It means I may have to look around the office and find someone to send home.
Certain expenses are sacred: payroll expenses, mortgage or rent, insurance, electricity, internet bill, cell phone bill, etc.. These expenses must be paid no matter how good or bad of a month you are experiencing. This means that you need to know what your cost of breathing is going to be for the next day, week, month, and quarter.
My definition of fiscal solvency is having this month’s mortgage paid, the coming month’s mortgage in my checking account, the next month’s mortgage in my savings account, the subsequent month’s mortgage in receivable, the following month’s mortgage in the sales pipeline, and the month’s mortgage following all of that in my dreamscape. You must look at every expense that you could possibly incur in order to ensure that you can profit in your present and future.
At my business, we have company cars. I have a BMW and my wife has a Honda. That is a structured capital expense. That is cost of breathing. I pay $X for my BMW lease, I pay $Y for the Honda lease and that is just cost of breathing. But a few days ago, the Honda’s battery died. We jump-started my wife’s car at seven a.m. and we took it to the garage. They said, “Sure, we can replace the battery but you also need new wipers,” then they added, “Would you like a car wash with this as well?” In the end, that is a $250 expense. That $250 is not part of COB. That was an incidental capital expense. But, if we decide to get a third company car for our office manager, that car would become incorporated into a new cost of breathing.
So why is calculating cost of breathing important? Cost of breathing comes before the IRS. If you don’t pay IRS, what happens? You will most likely get fined. Unless there was an overt intention to defraud the government and you have taken deceptive evil steps to scheme the system, you will not go to jail. Screwing the taxman is not as hurtful as not provisioning for cost of breathing. When you do not provision for cost of breathing, portions of your business will just stop functioning.
Let’s try an exercise to really drive my point. Take a deep inhalation right now and hold your breath. While you are holding your breath, imagine not being able to breathe because you can’t afford it. You have a little coin slot in your body that says insert to receive air and you have no change to put in it because you did not you did not provision for the cost of breathing. That idea can be referred to as “the month is longer than checkbook.” If that is happening to you, it means there are more days in the month than there is money in your bank account. It means you are not allotting enough money from inbound cash flow to pay your bills. That is dangerous. (Don’t forget to breath again!)
My first major business was a dot.com company. I built a system that was to be the foundation of a national network of dry cleaners. My partner and I created a data plan to tag every garment with an identification number; when garment #29305 was pressed eleventh time, the customer would get a coupon from the manufacturer to get the garment replaced. It was a good idea but unfortunately I did not know ANYTHING about dry cleaning.
I bought two dry cleaning stores; my business partner said that he would do all the cleaning at one store and he would send his sister to come help me run the other store. Everyday after the store closed, the first thing his sister would do was take the money from the cash register and count it into three separate piles. She explained to me that the first envelope she filled was her paycheck. The second envelope was the money to pay for the wholesale of washing the clothes. And, finally, the third envelope was the leftover money to pay the rest of the bills. She clearly had her personal priorities straight!
To her, her cost of breathing was her pay check, then her brother’s wholesale and then the rest of the bills. What happens when you do that? There is not enough money. My partner and I constantly needed to write checks to the company because we did not have enough money to fund basic overhead costs.
That company never made enough money to fund its own cost of breathing. Every week from my paycheck and my savings account, I gave money to the company. There was always enough money to pay his sister’s paycheck but not enough money for the electricity bill. Eventually, I had to quit. I told my partner that I could not do this anymore and would have to sell the company. He agreed. The men who bought our stores said they would give us $15,000. I would get half and my partner would get half but...we had $4,000 in overdue rent and an unpaid wash bill. In the end, I walked out with approximately $3,000 and I went back to work at my old job. So, I am all too familiar with the dangers of not considering COB.
There is also another concept to consider and it is what I call “windfall.” Looking at the monthly commission that I receive from Infusionsoft and ClickFunnels. All my clients have Infusionsoft and all my clients have ClickFunnels. They all buy using my affiliate link so although it is essentially nickels, I am still receiving a consistent stream of money from commission. The oldest client from whom I am getting commission originally bought in 2010. Let’s say I receive around $20 for month from a client who bought Infusionsoft in 2010. When you multiply the $20 times the X number of Infusionsoft users and the Y number of ClickFunnels users, it adds up.
Hypothetically, I make a total of $5,000 in commission between Infusionsoft and ClickFunnels. The key question is what am I supposed to do with that money? Should that money go towards paying cost of breathing of eLaunchers? NO. If it does, then what I am doing is taking a windfall and burning it. Elaunchers’ current cash flow should have no accountability to a windfall that comes in as a passive revenue. Ideally, the commission should go directly into either a business savings account or you, as the business owner, can take it home. You can most certainly take the money home as ordinary income and pay taxes on it BUT don’t chew up the money.
Frankly, this happens a lot. People tend to waste when there is no cause-and-effect relationship between inbound money and how that money is spent. Take, for example, a law firm that when you discuss the actual success of their marketing or look at the actual profits of each department, many groups are in the red. The question then becomes how do they survive financially? Well, five years ago they won a major case and now they receive a substantial payout of $25,000 per year. The firm has to do absolutely nothing in order to get that money from which they are funding their cost of breathing. Technically, the owners of the firm could fire everyone, take the $25,000 and go on a cruise. The lack of accountability in funding cost of breathing is dangerous as it impacts motivation for profits.
All of this is critical to the survival and success of your company. Now what you need to know is how to keep track of the financial data in a way that will be most beneficial to you.