Is it a business or a job that you own?

If it’s a job, then it pays you a salary. Hopefully, it’s a good, steady salary.

If it’s a business, then it pays you a salary (hopefully, a good, steady salary), plus it pays you something on top of a salary. That something extra is “profit.”

Profit is the payment you get for owning the business. It’s what’s left after paying all of the reasonable expenses of the business.

For a bunch of reasons, I find it helpful to think of what I’m earning in its component parts: salary and profit.

It helps when comparing your business to other businesses. It helps when talking to anyone who runs a “real” business, because that’s how they think and talk. It’s helpful for figuring out whether owning the business is worth your while and whether you should keep doing it.

How do you figure out what’s profit and what’s salary?

You estimate the reasonable cost of replacing yourself. What would it cost to hire someone like you who could do whatever it is that you do in the business?

That might mean that you’d need to hire two people. You might need a lawyer as well as a manager. Or maybe you could find a lawyer/manager/visionary like yourself to replace you. You decide what it would take and then figure out what those people would have to be paid to replace you.

If you determine that the cost of replacing you is more than you’re taking home, then you need to stop and think.

Why is it that you’re earning less than you could earn doing exactly what you’re doing on the open market?

Why is owning this business good for you?

If, however, you determine that you’re earning more than it would cost to replace you, then we’re on our way to figuring out how much of what you’re earning is profit.

Knowing that number and tracking it over time have value, as I mentioned above.

Going through the exercise may be helpful on its own.

What did you figure out when you did the math? What is the value of owning a practice?