#018 - You built a $500k business that pays you like an $80k job

In Episode 18 of The OvercomerHer Podcast, host Samantha Noelle breaks down why hitting $250K–$1M in revenue can still feel tight when you’ve scaled sales without building financial infrastructure. She explains how high revenue and low profits coexist through unclear margins, underpricing, scope creep, legacy clients, unbaked team costs, and avoiding the numbers. 

Samantha shares key benchmarks (service gross margin 60–80% and net profit margin at least 20%), calls out common traps like treating owner draws as profit, and outlines a CEO-level audit: break revenue down by offer, assign true delivery costs, calculate margins per service, evaluate overhead, compute your effective hourly rate, and identify the one number you’ve been avoiding. The path to $1M isn’t more hustle—it’s fixing the model, then scaling.

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Transcript

SPEAKER_00 0:00

You cross 250K and maybe you're pushing towards 500K plus. Your revenue is real, your clients are real, and the work is real. And yet you still feel like you're scrambling. Not because you're doing it wrong, but because you built the revenue without building the infrastructure underneath it. And now the stage that you're at, that gap has a cost, a specific, measurable, compounding cost that busyness has been quietly hiding from you. And today we're going to find it. Hey everyone, I'm Samantha Noel, and I'm your host of the Overcome Her podcast. You're listening to episode number 18, where we're going to talk about the difference between a busy business and a profitable one. This episode is not for someone trying to figure out if their business is real. You already know your business is real. You have the proof. This is for the female entrepreneur who has crossed a revenue threshold that should feel like freedom, but it doesn't. Somebody who is completely booked and financially tighter than the revenue number suggests she should be, who has been in business long enough to know that something in that model isn't adding it up, but has been too busy delivering to stop and do the math. And the problem isn't your work ethic. The problem is that you scaled your revenue without scaling your financial clarity. And at 250K to a million, that distinction starts costing you in ways it didn't when you were smaller. Let's talk about why high revenue and low profits can coexist and how it happens to business owners who just know better. And in fact, in all of my years of working with businesses from varying sizes, from a quarter million up to 30 million annual sales, and problems in business don't tend to discriminate based on revenue. And one of the things that I have seen many times is that people have businesses that are making real sales a million plus, and yet they're just not profitable. So this isn't a beginner business owner mistake. It's simply a growth stage trap that ends up catching business owners who are genuinely good at what they do. And here's how it ends up happening: your early years, you built revenue through proximity, your relationships, your reputation, your personal delivery. It all was built on the foundation of the people and things that were closest to you, and it started to multiply outwards. That model worked because you were the model. You didn't need financial infrastructure because everything ran through you and you could feel where the money was going. But then your sales increased. You got more clients, more complexity in your business, and way more moving parts. But the financial visibility didn't grow with it. You're still running the same gut feeling system at that revenue level that actually requires real data. And I see this time and time again with business owners. In the beginning, most times, small business owners and entrepreneurs don't put a lot of weight in having financial visibility. They're more concerned about investing in things like advertising and their brand and maybe the materials that go into their products or into the development of themselves that go into them providing better services. They rarely put money into the financial viewing of their business. And that habit often ends up carrying even later on into their business. And oftentimes they don't even think about hiring somebody who's a contractual CFO or contractual controller until they're a million plus. And even then, that idea doesn't even necessarily cross their mind. And the result ends up being that you have a business generating real money, but you have no clear picture of what the business is actually producing after everything that it costs to run. Maybe you have a bookkeeper, but bookkeepers rarely know enough or understand enough about financials in order to provide you real value. Unless they have an accounting background, they won't be able to provide you the real true financial insight. And even many accountants don't have the ability to provide financial insight because many accountants don't have financial literacy themselves. They're used to being an accountant and being a financial specialist and an accountant often are two separate things. And this isn't a character flaw on the business owners who operate like this. It's simply a structural gap, but it has a cost tied to it. And that number is sitting somewhere in your profit and loss right now, whether you look at it or not. What worked for you when you're small, when you were at 100K, 150K, or less than that, it doesn't work anymore once you start getting to a quarter million, half a million, a million in sales. And that's honestly where the gap between how you're operating and how you should be operating starts to become really expensive rather than just uncomfortable. Every industry has different benchmarks and different margins that the owner should be looking at and should be comparing their business to in order to gauge how healthy or unhealthy their business actually is. But I would say that there's some universal benchmarks that you can utilize in order to kind of gauge where am I? Is what I'm pricing and what I'm doing enough to sustain the growth of my business? Or am I capping myself out with where my margins currently are? For somebody who is in service-based, your gross margin really should be sitting at between 60 and 80%. Service-based tends to have incredibly low cost of goods sold because you're not producing goods. Most of the time, in service-based, your margins are subcontractors and maybe materials. If you're in the business of, say, a blue-collar business like construction, plumbing, HVAC. But most service-based businesses have very low costs of goods sold because it's merely the output of time and service. If you are using contractors and that leaves your gross margin under 60%, then you need to revisit your pricing structure. Your net profit margin after all operating expenses and before taxes should land at the very minimum 20%, and 35% is really healthy. And that allows you to continue to reinvest in your business to help continue propelling and fueling the growth of your business. If you're below 20% at 250K to 500K in revenue, then your business model is either too heavy in overhead or in scope. And another issue that I often see in businesses is that owner compensation at this level is still being treated as what is left over as opposed to a real expense. And if you're paying yourself from whatever remains at the end of the month after all of your cost of goods sold and your overhead cost, then your pricing structure hasn't actually factored in the true value that it costs to deliver the services that you deliver. And that goes back to being a pricing issue. And when you're at this level, when you aren't pricing properly, what ends up happening, especially if you're in a service-based business, is that you end up having scope creep on projects and on the services that you're providing, which means the clients are getting used to having and receiving more from you than what they paid for. And now that's branded in to your entire business model. And moving away from that is not impossible. It's just challenging and difficult because you will ultimately lose clients and customers who are used to your old way of operating when you do decide to price properly based on inputting the true value of everything, which also includes your salary. Another thing that I often see business owners do is they don't raise their prices over the years and over the time. And as they become more of an expert in their field, they don't price according to that. And when you don't price according to the value that you're putting out there, you're making it harder for you to grow your company to that half a million, to that million mark that you actually want to hit in your business. You're making it really hard to move past that ceiling and past that threshold because you're not charging enough to be able to continue investing back into your business in a way that allows you to grow and scale. And all of your growth and your scaling comes out of your profit. So you can have as high revenues as you want, but if your profit isn't there, you can't grow and you can't scale. Oftentimes, business owners that don't really dissect their financials or have that financial person advising them and helping them dissect their financials. And I'm not talking about the pennies, I'm talking about the things that actually have a significant impact on the spending of your business. Often they don't evaluate what I am paying percentage of revenue-wise on tools, on subscriptions, on subcontractors, on the software, on the supplies in my business, on the advertising. How much am I actually spending as a percentage of my revenue? How does that compare to the market and other companies that are within my industry? And is it compatible? Or am I spending more than the average? Which then means either you're spending money in the wrong places, you're not pricing out and sourcing out where you're buying things from, or you aren't pricing high enough to your end user. And it could be a combination of all of those. We also always see in businesses because you've been doing this for a while, you have customers that have been with you from the beginning. And that also means that those legacy clients that have been with you for a long time often are underpriced, and you often continue to underprice them because you feel obligated in some way to keep them at lower pricing because they were there from the beginning. But if they were there from the beginning, then they also want to see your business thrive and do well. And I've talked about in other episodes where yes, sometimes having that conversation with clients about raising your prices is really uncomfortable. But the truth of the matter is, is that if you are pricing based on value and you have run the numbers, and this number is not just coming from a feeling or pulling a number out of the air, that you're actually considering what is my salary? What are my overhead costs? What are my costs of goods sold? And then pricing based on that, if you have done that work, it means that other people within your industry are probably about the same price as you, maybe more and some are less. And if somebody wants to leave you because your price increases to equal the value that you're supplying, then that's on them to go find somebody else who's cheaper. But again, cheaper doesn't mean better. The other thing that often happens is businesses who are around that $250,000, $500,000 a year mark. Now they have a team. Maybe you have an assistant and maybe you have one other person that's helping you part-time, or you have a part-time assistant and maybe one full-time employee. Rarely do those salaries end up getting baked back into your pricing model. When you're a real business that is growing and scaling, you have to bake those costs into your pricing because that's what allows you to scale. Your margins will continue to stay low. Your profit will continue to stay low if you're not factoring in those added costs. And when you started your business, you probably priced with just you as the sole operator. So maybe you were charging a fair rate when you first started out, and that allowed you to scale up to that 250k a year mark. However, if you don't factor in those other salaries and contractor prices that you're paying, the team that you're now building and working towards building even more, then you're going to keep undercharging clients. And that might be a hard thing for you to mentally and emotionally get past. You might feel that your clients and your customers won't accept a higher price just because you have employees. But here's the thing: when you have employees, your customers have an added value. Think about this. If it's just you running the business, everything runs through you. So if you're sick, if you're injured, if you take time off, now all of a sudden your customers and your clients have less access to you. But when you start to hire people, the processes and the systems in your business should start to run smoother. Your customers and your clients should have more access to the resources in your business. And that comes with a premium charge. So there's a difference in a sole proprietor model and a model where somebody's actually growing beyond themselves. And some people don't like that model, but that's okay because there's a lot of people who really appreciate the extra value that does get added when you have a team below you. I see a lot of business owners at this level who are really busy. They're hustling, they're taking care of their clients, they are still very hands-on in the business. They have an admin person or they have the right hand person, and they still have to have a lot of hands-on. Everything still has to run through the owner of the business because they haven't built up to a place where they can walk away from the business for three months, four months at a time. And at this level, busyness is no longer just a productivity problem, it's a financial visibility problem, meaning you're not looking at your numbers when you're that busy because it's the last thing on your mind. You're fully booked, you have a built-in reason not to look at the model because looking at that model might tell you that full capacity at your current pricing isn't actually enough. And if it's not enough, then you have to change. And making that change means disrupting what is currently working on the surface level. Meaning you show up to your business, you know what to expect, everything is running, it's copesthetic. Yes, you have problems, yes, you have challenges, but you are okay with that because you know what to expect because you have been in this business for so long that the problems and the challenges continue to kind of remain the same. You've kind of hit that cap where you're not continuing to grow into the next level. And that is a problem if you want to reach that million dollar mark. So your business continues to stay busy and your financial audit just continues to get deferred. And then the margin problem compounds quietly in the background, which makes it even harder to improve and change when you finally realize it's hurting you, not helping you. And there's a specific pattern that shows up at this stage worth naming. It's the founder who has her best revenue year and still cannot clearly answer what the business made. And not because you don't care, but because you've been running so hard for so long that financial clarity has just become something that you would get to, and getting to just kept getting pushed by the next client, the next deadline, the next deliverable, the next fiscal year, the next quarter. And the really hard truth is that busyness at that stage is sometimes a form of owner control. If you don't look at the numbers, then you don't have to confront what they tell you. And when you have to confront what they tell you, you feel a sense of out of control. You realize that maybe you're not as in control of your business as you thought. It's going to show you what your hourly effective rate is. And the hourly effective rate is your income after all of your overhead costs, plus add back what your salary is that you paid out to yourself, and divide that by how many hours you actually worked in your business in the year. And what most business owners will realize at that stage is that their hourly effective rate is significantly lower than what their revenue number actually tells them. And that number can be super hard to sit with because it's a wake-up call and it's a bit of a rude awakening. So many business owners just don't look for it. Now I want to talk about what are some signs that your financial model has a problem and your revenue is simply hiding it. Because I see a lot of business owners talk about revenue. I earned a million, I earned two million, I earned my first six figures. I get it. We all do it because it's something that we feel really proud about because it's like when we have this number, we have arrived. But the thing is, we feel anxious because we're not actually as profitable as we thought getting to that number would make us. So the first sign that your model currently has a problem that your revenue is just masking. And that is that your revenue has grown year over year, but your own personal income hasn't moved proportionally. So you have more clients, you have a higher top line number, and you have the same or similar take-home. Has it grown proportional to what your revenue has? The same thing when I look at profitability is often what I see is clients work harder, they get their sales to increase, but their profit drops by five, six, seven percent. Why did that happen? Their gross margin dropped by 10%. Why did that happen? If your gross margin drops by 10%, that means that you worked harder for less money. And the point of growing your business should be to work smarter. It should mean that you're becoming more of an expert. You're providing more value to the people that you're serving, which means your rate should also go up. And if year over year your gross margin is declining, it means you're not charging more. It means that the market is charging more, but you're not charging more in your business. The second sign is that you are at or near capacity and you can't figure out how to raise prices without losing your clients. And that means that your clients at this point aren't buying value. They're just buying access to you at a rate that you've been holding steady for years to come and that they're now comfortable and accustomed to. Again, that's a positioning and pricing structure problem, not a market problem. The market's gone up, but you haven't gone up. You're not positioning the type of client that you're serving and the value that you're providing. And I will say this a million times: value and vision. You're selling people on value and vision, not a price. The price comes after to equal the value and the vision that's being sold and that's being given and produced. You're solving a problem, you're charging the price for the problem that you're solving. The third reason is that you have revenue, but you don't have equity. Meaning your business is generating 250K plus 500K, 600K, 700K, and yet you can't maintain two to three months of operating expenses because you don't have that in your equity. You don't have enough retained earnings in your business to be able to continue operating in the company if you have a couple of down months. And this is where I end up seeing businesses having to lay off people because their business dips for a couple of weeks and they have to lay somebody off. And that is a gross margin problem and or a cash management problem because your profit and loss can look like you're doing okay. But when you start to look at the balance sheet, if you're bleeding out cash every month, you have a cash management problem. Now, both of those problems are fixable, but at the level that you're at, you don't want to ignore it because you're only snowballing that problem to accumulate and get worse over time. The fourth sign you don't know right now what one of your services or offers is generating the most profit. If you don't know what is your most profitable service, this is a problem at the stage that you're at. Because as a business owner, you have to start. Making harder decisions and harder cuts in your business in order to grow, which sometimes means letting go of the thing in your business that is the least profitable. You know, Jim Pattison was rumored to fire the lowest performing salesperson every single week. Now, is that true or not? I've heard it's true. It's pretty cutthroat, but the idea behind it makes financial sense when you're thinking about the fact that you want your company to grow. Many large companies that produce products will get rid of a division that isn't performing because it's their bottleneck. It's taking up capacity, it's taking up space and time and resources in their business, but the margins are so low that it doesn't make sense. It makes more sense to funnel those resources that they had into the higher profit producing services and offers that they have. Think about it, because that's where you begin to see the growth in your company when more of your resources go into the higher profit producing offers and services. And this is the same as having a client that's a cheap client takes just as much energy, if not more, than the client who is higher end, pays more, doesn't complain about their billing, is okay with what they're being charged because they see the value. The client that pays less is often just as much work as the bigger client, if not more. The fifth sign is you have those legacy clients that I mentioned whose rates haven't changed in two or more years. I've done that in my own business. I get it, but when you're operating at such a level, 250K, 400k plus a year, this is one of the most common and expensive margin leaks that you can make in your service business at that stage. Your clients from your earlier years are often getting significantly more value than they're paying for because you've grown and your expertise has grown and deepened, but the price never moved. If you're providing more value, you need to charge your clients and your customers to match that value. And the legacy ones, they should want to pay more because they have realized that they wouldn't be where they are with whatever it is that you provide to them without having had you around. They should be grateful for the fact that they've been able to work with you and they should want to pay more. If they're still looking for a bargain, then they're not staying with you because of the value that you provide. They're staying with you because they're comfortable and they're getting something from you that's costing you growth in your business. Now let's get into just looking at some of the things that you should be considering as the CEO of your business. One of the first things that you should do is run your last 90 to 180 days of revenue by service or offer line. Not just your total sales, but break it down by the services that you actually provided. Group them together and then figure out what each service or offer it is that you have in your business, what percentage of your revenue are you obtaining from that service? And if you can't pull that information, if you can't pull that data, that's a huge clue and a huge red flag that you need to implement this right away. Those lines should not all be broken out on your main profit and loss statement. On your main profit and loss statement, you just want to have one or two lines for revenue, but then you should be able to drill down very easily to figure out how much am I making from each product or service that I have and how much of each product or service that I have correlates to my total revenue. And at this point, I'm assuming that you have a good accounting software in place, and any good accounting software would allow you to break this down and drill it out. Sometimes owners want to drill down too much into information that it's not actually beneficial. It's not beneficial for your time, it's not beneficial for the extra added cost because when you start looking at things that account for 1% of your sales, that's not meaningful data. It might be meaningful in the sense of maybe it's 1% of your sales, but it's 20% of your time. But you should want to group things into similar or likeness. The second step is to assign the real cost of delivering each service or offer. So what is the contractor time? What is your time at a real hourly rate, not what you wish it was, what it actually needs to be for the business to be viable long-term, tools and overhead attributed to that service. So essentially what you're looking for is your variable cost. Your variable costs are anything that increase with one output of whatever your service or your offer is. And you want to figure out what the cost of that is. Step three, you want to calculate your effective margin per offer, meaning what percentage of that revenue line remained after the real delivery cost. So normally you have your gross margin, which is your sales, less all of your cost of goods sold. Now you're just looking at that per line item, per group offering or per group service. The fourth step is to look at what your overhead costs are, which are typically your fixed costs against your gross profit. So your overhead cost is everything that it costs just to keep the business running with the lights on. So your rent, your utilities, administrative staff, management staff, software, subscriptions, marketing, professional fees, legal accounting. What remains after that is your net. And if it's not at least 20%, then something needs to be evaluated in your business and you need to figure out what it is. Are you spending too much or are you not charging enough? The fifth step, calculate your effective hourly rate, meaning your hourly rate, which is taking the net profit. So the profit after your subcontractors, after your direct materials, and after all of your overhead, then you add back your compensation for that quarter and divide it by the total number of hours that you worked, not just your billable hours, your total hours. So if you had a thousand hours that you worked and only 750 of those were billable, you're dividing it by your thousand hours. Now that number is what you actually earned per hour invested in that business. And if it's lower than what you would charge to a client for your expertise, your model needs restructuring. The last step is identify the one number that you've been avoiding and not wanting to look at. Every CEO, every business owner has at least one. Maybe it's that legacy client rate that hasn't moved. Maybe it's your advertising costs that you keep hoping will have a return on investment, but don't. Maybe it's the contractor fees that are too high for what is actually being given. Maybe it's your gross margin. Maybe it's the service that you keep providing to customers that actually costs more for you to deliver than it generates. So does it need to go or do you need to increase your rate on it? Whatever that number is, find that number, call that number out, and that's the thing where your next level of profit is sitting. Now let's talk about just some common mistakes that do tend to happen when you're at this stage, when you are beyond the solopreneur and you want to move up and you want to scale your business into that million, and you're in the in-between, your sales are increasing, your revenue is going up, but it's going up because of volume, not because of margin. Your margins actually might be going down, but your revenue might be going up. And what that means is you're working harder than you were before. So if it feels like you're working harder than you were before, it's because you are. Another mistake is treating owner draws as profit rather than compensation salary. Because what happens is when you draw money out of the company, if you're not counting that as actual salary paid to management, then it's not showing up on your profit and loss. It's showing up and being buried on your balance sheet. So you actually look like you're more profitable than you are, and that can create a continuation of you underpricing because you think, oh great, I have a 35% margin, but it's because your salary as the owner hasn't showed up on the profit and loss statement. Another mistake is that business owners will assume that busyness equals success and that their business model is actually working. Men lie, women lie, numbers don't. Look at your numbers, not your feelings, not how many clients are coming in and how busy you feel and how stressed you feel. That's not saying that your model is successful. The other mistake, which I've already named, is avoiding that pricing conversation because clients who've been with you for a long time might leave. And I did a whole episode where I belabored on this, and I've said it earlier in this. Customers that have been with you for a long time and are going to leave you because you raise your prices to equal and match the value that's being provided. Those are customers that are going to have to pay the same rate to somebody else somewhere else who haven't been serving them and delivering them great service for years. And if they find somebody cheaper, they're just finding somebody who's going to provide less value than you're currently providing to them. So what they're saying is they don't value value, they value price. And by you allowing them to walk, if that's what they choose, you're opening yourself up to clients and customers who actually value what you are going to be offering in your services and your offers. Another mistake is building the next year's plan from last year's revenue without even auditing what the margins were last year, which is why when I review financial statements and I get a company cleaned up, I often tend to see that their margins decrease over the years instead of increase. And you want your margins to stay the same, bare minimum, or increase? Questions for you to take away and leave this episode with and go back to your own business and ask, what is your profit margin right now? Not approximately, what is that actual number? Not, oh, I think it's about 35%. Is it 37%? Is it 33%? What is the actual profit margin in your company right now? What one of your services is the most profitable per hour of your time invested? If you were to calculate your effective hourly rate, which I discussed earlier, across your total hours worked, would you be comfortable with that number? You might be shocked to find it's substantially lower than you thought it would be. So it's good to know that number. Would you be shocked or would you be comfortable? What is the one financial number in your business that you have been avoiding looking at? If you had to restructure one thing in your pricing or your service model to improve margin by 10% in the next 90 days, what would it be? Now I've just given you a lot to take away from on this episode and a lot to think about and a lot to look over. So what I want you to do is not next quarter, this week, run those questions through your business this week. If you can't run those, if you find you come up with blocks, then that's something to work towards in the next 30 days is being able to answer those questions and especially be able to answer those questions by the end of next quarter. Pull your 90 days, break it down, break your sales down by your offer and assign real cost to each offer and calculate your effective margin per service and look for that number that you have been avoiding looking at. You build a business that generates real revenue. So your next step isn't more clients or more marketing, is understanding what the business you already have is actually producing and closing that gap between what it should be generating and what it is. The gap that you have is not a failure, it's just information. And at your level, information is the asset that you've been underutilizing. That $1 million path or the $1 million plus dollar path isn't built by working harder inside of a model that has a margin problem. It's built by fixing the model and then scaling it in that exact order. Okay, everyone, that is it for today's episode. I hope that you found a lot of value in today's episode. I hope that you're able to take away some of the things that we've talked about, apply that to your own business, run your own numbers. If you haven't already, that's going to be the thing that's going to help you grow to the next level because you do need the profit in order to be able to reinvest back into your business and scale your business without losing your absolute mind. And I have enjoyed being here with you. And I hope that you guys will tune in every Monday and every Thursday. Join me over on my Facebook group, Built for Profit. And I'm also on Instagram at Samantha Noel Co. And feel free to email me with any of your suggestions for the show to the overcomeherpodcast at gmail.com. Again, it's the overcomeherpodcast at gmail.com. And again, I am wishing you a ton of success in your business. And I hope you guys have an amazing day, and we will see you soon.

SPEAKER_01 37:03

We made I can't believe we really made it was a long road together. But we made boy girl who couldn't wait to play down by the river, running through the fields of hay.