The Moneymaking Formula for Math Flunkies

During college, only one class brought me close to tears… calculus.

Call me stupid, but it took me forever to start understanding how equations, graphs, and numbers all fit together. I spent 40 hours a week studying for that one class and nearly fell apart after every test.

Ultimately, I got through it, but I started to wonder, “Am I really cut out for business? Doesn’t it involve crunching a lot of numbers?” I couldn’t imagine spending the rest of my life going through that kind of misery.

Have you ever felt the same way?

Well, I’ve got good news and bad news. The bad news is business does involve some math. The good news is it ain’t calculus.

You can actually reduce moneymaking to one simple formula. It governs everything from your profit per product to how much of your salary you’re able to save and invest. And it’s very, very easy to understand.

What is this formula?

Put More Money in Your Pocket Than You Take out

Huh? That’s it?

At first blush, it doesn’t seem like a formula. Where are all of the variables, operators, and graphs?

There aren’t any. Like I told you, this is a formula for math flunkies. We’re going to make it as simple as possible.

Here’s what it means: only do things that make you more money than they cost you. If you do that, you’ll always make money. If you don’t, you’ll always lose money. There are no exceptions.

Let me give you a few examples.

Popsicle Sticks and Ninja Stars

When I was a kid, I used to take wooden popsicle sticks, glue them together in the shape of a cross, and call them ninja stars. It was great fun, throwing them at people. They were remarkably accurate.

One day at recess, when I was preparing to launch my next attack with a fresh batch of a half a dozen stars or so, a kid came up and asked, “Hey… how much do you want for one of those?”

I thought about it for a minute. “A quarter each,” I told him. He handed it over, and that was the beginning of my ninja star business.

It was a great business model. Technically, the profit margin was 100%, since I used discarded popsicle sticks and the school’s Elmer’s glue. Every sale put $0.25 into my pocket and took nothing out. It follows the formula perfectly.

The problem was supplies.

Within a week, I had kids lining up to buy their own ninja stars. I used to go through the trash cans every day after lunch to pick out all of the old popsicle sticks, so I would have the inventory to supply them. It was nasty work, but I had a business to run.

In time though, I couldn’t find enough popsicle sticks to satisfy the demand. I thought about buying a whole bunch of popsicles, eating them, and hoarding the sticks, but they cost almost $0.20 apiece. Add in the cost of the glue, and I would be taking more money out of my pocket than I was putting in. That violates the formula.

But then one day good old mom came to the rescue. “You can buy those at the craft store, you know,” she said. “It’s only about $5 for a thousand.”

I’ve never been good at math, but it immediately occurred to me that she had just solved my margin problem. In the end, I think making each ninja star cost me about $0.12. I could sell them in bulk for $0.20 each. Once again, I was putting more money in my pocket than I was taking out.

Within the next year, I’d guess I sold well over 2,000 of those stars, making several hundred dollars in the process. At the height of the operation, I actually had kids going door-to-door in their neighborhood, working on commission. Neighbors still talk about it.

Eventually, I figured out that I wasn’t really making that much money per hour, but it still taught me a valuable lesson about how to make money. Since then, I’ve started multiple companies in several industries, and they’ve all followed the same model.

The truth is, it works with anything you’re selling. Just make sure you’ve added up all of the costs, including materials, labor, and your own time. If it costs you less to make it than you can sell it for, then you may have a workable business.

Mom Goes Back to Work and Loses Money

Don’t have a business or product to sell? Here’s an example that may hit closer to home.

A couple of years ago, my neighbor decided she was tired of spending all day at home with the kids. She wanted to get a job and start earning her own spending money, even if it was a low-paying position.

She eventually got a job as a secretary, working about 20 hours per week and making $12 per hour. Of course, she also had to drive to work, which took about 30 minutes each way. Then she had to put all three of her kids in day care. With less time at home, she also started buying more takeout for the family.

Can you see what’s coming?

After a few months, my neighbor realized she wasn’t really making any money. After taxes, she was only bringing home about $180 per week. Day care for three kids was something like $140 per week. The extra gas was another $40 per week, and the food was running another $20 per week.

The end result? The job was costing her about $20 per week. Ultimately, she decided it was worth it because it got her out of the house and used to working again, but I thought it was an interesting example.

Have you stopped to consider the cost of your job?

When you add together your gas, car payment, mortgage payment, food, business clothes, and everything else, you might be surprised by how little you’re actually making. I’ve heard of attorneys in top New York City firms earning $180,000 per year complaining about being broke, not because of a low salary, but because of the cost of the lifestyle they are expected to maintain.

When considering your career options, you might be tempted to consider just your salary. Don’t. No matter how much money a job is putting in your pocket, it’s not worth it if it’s taking more money out. The formula for moneymaking is just as valid here as with selling products.

How to Decide Who to Hire

Who makes the best employees?

Companies have been arguing about it for centuries. Some say it’s talent. Others claim it’s intelligence. Still others believe its work ethic.

All of them could be right, but from the perspective of building a profitable company, it’s much simpler. You just follow the formula. Hire employees that put more money into your pocket than they take out.

If you’re going to hire Sally and pay her $50,000 per year, then she had better either make or save you more than $50,000 per year. Long-term, it’s the only way you’re going to build a profitable company. Start hiring people that cost you more money than they make you and you’ll go bankrupt fast.

The Underlying Requirement: Measurement

This stuff is pretty easy to understand, right? So why don’t more people do it?

Like most things, there are lots of reasons, but I think the biggest one is people fail to measure the costs of what they’re doing. They just guess that they’re turning a profit at the end of the day, neglecting to ever stop and add it up.

Then they’re surprised when they go bankrupt.

Believe me, the alternative is less painful. Take the time to figure out exactly how much your job, business, or product is costing you. Total every cost, no matter how trivial. Then subtract it from the total amount that you’re putting in your pocket.

Do you think you could do that, if your finances depended on it?

I’d bet so.

Addition. Subtraction. It’s really not that hard… even for a math flunky.