In the last 30 years, I have reviewed somewhere between 200,000 and 250,000 personal and corporate tax returns. In each case the review encompassed 3 years of personal and company tax returns. This time period was the minimum needed to recognize and establish sales, profit net worth and profit trends.

While at Dun and Bradstreet, I was trained to spot these trends and assign a D & B rating. Since I was one of the top credit reporter/business analysts for this large firm, I was able to recognize these features in the tax returns at light speed. My reports were graded and found to be accurate and reliable.

When I started in the SBA and commercial loan arena in 1981, I was faced with the same type of analytical requirements and the same tools, but for different ends. When analyzing a loan application~ we used the same three years of financial statements and tax returns along with resumes of the business and the individual borrowers.

Our analysis as lenders, and keep in mind I worked for two of the largest lenders of their types in the nation, made it possible for us to lend to small business owners in volumes that approached $200,000,000 or more per year.

For many years I was totally immersed in the day-to-day minutia of this analytical task. It was not until about 1998 when I noticed something that had escaped me for decades. The quality of business owners and entrepreneurs would have gone unnoticed unless but for a simple fact. I found myself working with many clients who had borrowed repeatedly from me before. These repeat borrowers of SBA loans (and yes, you can borrow repeatedly with SBA funds) had provided me with a track record of their financial well being on a personal and company basis.

What I noticed in almost all cases was that is that the personal and business income was largely static over a 3 year period. After giving this subject some real thought, the truth is that these business owners are stuck at a specific income that varied only in a narrow range. Time and time again I see increases in gross company income but little increase in the net profit, personal draw and take home pay.

What usually happens is a steady bleed off of profitable cash flow by poor cost controls, allowing costs to randomly nibble away at the profits. If a firm increases sales and contains costs, as in the case of a few of my clients, the bottom line can grow exponentially. Effective cost containment, when coupled with a modest increase of actual fixed costs, causes the break even point to move down sharply. This explosive profit growth then ties intimately to exponential wealth and income growth. But most of the clients did not see this, they were stuck and their income was static.

My own firm experienced the nibbling effect of cost growth. I let it happen consciously, to save on taxes, but unconsciously as I was comfortable at a certain income level. This same habit is undoubtedly ingrained in the thinking of the business owner. That brings me to my next idea.

It appeared that all these thousands of business owners were fixed at a specific income and did little to increase their pay check. It was a very weird effect that I ended up naming ‘THE INCOME SET POINT’.


Most people have a weight set point. It is a function of their caloric intake and output of energy and exercise. This establishes a body weight that does not vaiy much year by year. Weight does increase over the decades and that’s the reason so many Americans are overweight. But veiy few Americans are overpaid. If you look at the income distribution in the U.S., the majority of income is skewed to the top few percent. Why is that? Why do some people produce huge income with no more effort than another person producing an average income? Why do some people make $500,000 a year and others only $50,000?

I concluded after thousands of personal interviews with business owners and borrowers that they simply do not see themselves as ‘stuck’ at a certain pay level, whether it was a paycheck from an emp1oyer or their own income from their business. They were unconscious of their situation. It’s commonly accepted that the typical business owner makes about 1.5 to 2 times the income of the equivalent employee doing the same job. That may seem like a lot, but when you consider the risk of business ownership, this modest difference in income is really not worth the risk and liability of business ownership.

So, why would someone accepting this level of risk accept a modest increase in their personal return? It appeared that clients had accepted their income and were comfortable with it. They compromised with the apparent tax burdens on their profits, the effort of growing their business, the hours needed, the education required to step outside of their level of business knowledge, even the personal situation and expectations of friends and family. In short, they settled!!! Settled for their particular position in the business arena, amount of sales volume, their share of the volume of sales in a specific geographical area or industry, settled for their business lot in life.

This bothered me because I know first hand that a business is the most essential tool to building financial well being ever created. And after all the effort to start and run a business, the owners were not living up to their full potential. In short, they gave up on their dream and compromised. They excused this by rationalizing their fate in many ways, even to blaming others for this turn of events. This is not an uncommon syndrome. We see it in ourselves and other every day. It is a way that we condition ourselves to the way things are.

Now, the question arises: Is there something wrong with this? The answer depends on their point of view. If you are comfortable and see your business where you want it to be, then there is nothing wrong with this view point. You will still do well and may very well end up well off. If you are not comfortable with your present situation and want to do something about it, the guide can certainly be a good tool, as can SBA loans and other ways of growing your business.

If you want to move on with your business boosting income and net profit along with your personal income, do the following exercise. Take a look at your last 3 years of business tax returns along with the income you reported on your personal tax returns. Record each year’s sales, net profit and personal income, starting with the third year and going to the latest year, in columns like this:

  YEAR 3 %(*) YEAR 2 %(*) YEAR I %(*)
Cash Flow            
AGI (**)            
(*) Increase / Decrease by %
(**) Your taxable income

Do you notice a trend in sales, net profit and personal income? Is it increasing or decreasing? Is your cash flow, a tally of profit, depreciation and discretionaiy expenses growing or falling? Are there seemingly random fluctuations in any figure? Are they upward or down trending? If so, why?

Downtrends can be very frightening if they affect your business ratios, profit or ability to pay bills. This is what a banker looks at when you apply for a loan. If you haven’t done this analysis, don’t be surprised by the questions your banker throws at you. You can be approved or declined based on your answer. I use these changes to justify the loan request. Your knowledge of these changes to the financials are a very effective sales tool when talking to a bank.


Back to the set point! If one begins to think seriously about increases in income, particularly income in a business, the possibilities are literally unlimited! Income increases set the stage for the much needed explosion in your wealth. If a person consciously sets their income point higher and does the needed work of coaching, delegation, income sourcing and cost controls I mentioned previously, the income growth can be explosive. Wringing out costs and expenditures that are unneeded can produce great bottom line yields.

We must talk about reducing taxes, the BIGGEST! !!! cost to companies and their owners income. When I review tax returns, I see that the raw cost of state and federal taxes easily outstrip any other cost short of the materials & employee expenses. It is often the largest single expense and as we now know, it is controllable. We know that increased contributions to retirement plans defers income while allowing the set-aside funds to grow tax deferred. This is an exponential wealth multiplier plus building business income in the same manner.

But cost control can only effect a qtiantifiable set of dollars to the bottom line and the owner’s income. What we need to explore is real and substantive boosts to the bottom line. By definition, the bottom line is the net profit of the firm plus the owner’s draw/salaiy. In a sub-chapter S-Corp., that income is clearly outlined by the corporate profits and salaiy appearing on the personal return of the owner.

Just how easy is it to increase income exponentially? Quite easy actually. A modest income in sales of 20-25% will achieve tremendous growth in business and personal income. By using break even analysis of the business operations will quickly run cash flow to the net profit line proportionately much faster than the sales growth.

Let’s look at the example below. Assume a firm grosses $1,000,000 a year. If sales go up by 20%, the revenues go to $1,200,000. What happens to the profits if variable costs remain the same and fixed costs are contained.

Sales $1,000,000   $1,200,000  
COGS $500,000 50% $600.000 50%
Fixed $ 350,000   $ 350,000  
Net $ 150,000   $ 250,000  

If cost of sales is held at 50% and fixed costs don’t jump, then the net profit increase is 67%. That’s $100,000 more in the owner’s pocket. This is a quantifiable and measurable effect. it is something I see on occasion as most owners don’t evaluate the effect of this transforming detail. They allow costs to ooze upwards, but nibbles away on their efforts to boost net income. Then they say ‘see, after all my work, my income didn’t increase a single penny’. I bite my tongue and say, ‘let’s get you an SBA loan so you can really boost sales’.

It is really much easier to double income than it is to increase wealth by the same margin. Wealth production is a function of time. You can get wealthy the old fashioned way... you earn it over time! You can also increase wealth and income the new fashioned way you supercharge it! How? By using your presently profitable business model coupling ruthless cost containment with modest, yet sustainable, sales increase.

We are not talking about growing sales 100-200% a year. That is generally not possible without major changes within the owner. Since we are not looking for substantive change, you, the business owner, we are talking about a toolbox of ideas to ramp up your income. This incremental increase in gross revenues is attainable without a lot of heroic efforts. If the business owner is into heroics, more power to him, but this is not up for discussion here. The best way to grow personal take home income is with modest revenue increases. Buying another business can achieve that and we will show how that is feasible and quite normal. Now, here is the kicker.

If the business owner increases his or her business net income by $1, the value of the business increases by $3-$5 due to the business valuation model we use to determine sales price. It is said that the most valuable asset possessed by the business owner is a business. If there was an easy way to boost wealth incrementally, then an explosive growth in the value of the business is a natural and expected by-product of income increases.

Using the above calculation, the value of the business with$ 150,000 of income may be no more than $45 0-500,000. The lower the income, the less valuable the business is. That determination is based on whether the buyer is just buying ajob for himself or a really thriving, growing business with lots of upside potential.

The value of the business with a 20% sales growth coupled with a 67% growth in profits could easily be 5 times net profit, not just 3X. The $1,200,000 revenue model is growing and could yield a price of $1,250,000, nearly three times the value of the business with the lower sales.

If there is a case for bottom line growth yielding an exponential increase in wealth; this is it. Not only did the owner put $100,000 more in his pocket, he increased the business value by $800,000 or so. ‘While this is an optimal situation, we used statistics to support the concept that this is a real world example and worthy of consideration.


Now you can use your sales and income chart to calculate the value of your business. Do you have a business with spotty erratic sales, swinging up and down annually? Is your business robust with larger increases, but no corresponding increase in profits?

No matter what your chart looks like, you can get a reasonable expectation of business value by multiplying your cash flow by 2, 3 or even 5 times. This is quite likely the price you will get if you sold today. Since you know the value of your business today, what can you do to boost the value of this wealth producing machine tomorrow? Let’s look at the wealth producing effects of other investments and see how they compare to your business and its value.

Is it easier to increase wealth or income exponentially? Let’s look at the math. To safely increase wealth without leverage, one must choose an investment vehicle. Stocks have returned 10-12% reliably for decades. That means your investments double every 6-7 years. That is a slow, but steady process and yields about an 8-fold increase in 18-20 years. That assumes no catastrophic turnabouts in the stock market... .like the 2000-2002 years.

Bonds reliably yield about 5-6%, doubling every 12-14 years. But inflation erosion and taxes or yield will crater that income growth and yield appreciation. Frequently bonds yield zero return as a result. Real estate is the most reliable source of wealth increase. It takes decades, but provides tax shelters plus tax deferred income and appreciation on an incremental basis. It can bring 20-30% R.O.I. if managed appropriately over a long time period without turnovers in sale of properties or economic cycles playing havoc with returns. The yield is steady and with some modicum of safety,but arithmetic nonetheless. There is nothing wrong with this yield if it is recognized as a ‘safe’ portion of a balanced portfolio.

But what if you are already taking advantage of these investments and don’t feel like you are doing enough to wring out the best? If you own a business and are veiy good at it, as most people are, you already have the best means to enhance your personal financial well being. A business is a cash flow machine. ft allows you to:

1. Live well and within your means (hopefully).
2. Buy income producing assets like real estate and other businesses.
3. Fund a retirement plan and reduce your taxes.
4. Build a valuable business for sale at a later date.

One of the unique qualities of a business is it produces income year after year like an annuity. But the best part is that you can sell it once you are done. Can you imagine tiying to sell your job you did for many years. See if someone will pay you 3 times your annual salary to take over your position when you decide to leave. The fact is you would probably have to pay them to take it. That’s the joke of working for someone besides yourself. Your income is not portable or valuable period.


Where to you rank in the income level compiled by the IRS? The top 50% of all income earners paid
96.1% of the personal federal taxes. The top 1% paid 37%. How does this chart compare to your








Once you understand your income set point and see it for what it is, a barrier to your future success, you can set about changing it. When you do, you will change your world and everything in it. Once the change takes place, you will never look at your business or money the same again.

I have studied letters, books, periodicals, classes and about every guru, Wall Street and the seminar business has to offer, and no one has ever commented on this phenomenon. If this strikes your interest, I hope you take advantage of this guide and the resources in the website to alter your understanding of loans, money, business and income to your life-long betterment. Thank you.


Copyright 2004 Francis Financial: All Rights Reserved