To hold your standard of living, and nothing more, your business has to produce well above it. If you cover exactly what you spend, it feels like balance, and in practice you are on the long road to insolvency.
Above your standard of living, even to stand still
Here the source gives a law that sounds like common sense and is almost never followed. For an individual, it says, a person must “produce in excess of his standard of living just to retain and maintain it”.
Notice that the sentence is about keeping what you have. The surplus above your standard of living pays for whatever breaks, wears out, runs out or gets dearer while your attention is elsewhere, which makes profit the wrong name for it.
Suppose an installer takes home exactly what comes in. In the first year that works. In the second year the engine goes in his van.
Now suppose a consultant draws sixty percent of what comes in and leaves forty percent in the business. Her income is the same as his, and she has no bad weeks.
How far above, and why one-for-one is fatal
At this point the source goes past the principle and gives a number. The surplus varies from role to role and from job to job, and it has a floor it never drops below. In industry it is considered normal to ask for more than that floor, to protect standards and solvency. In some industries the surplus is very high indeed.
At the end of that passage comes the sentence the chapter exists for: “any idea that it should be one-for-one is fatal”.
One-for-one is the state where the business brings in exactly what you spend. From outside it looks like balance, and nothing about it sets off an alarm. Without a surplus, though, nothing is left to cover what breaks, wears out and goes up in price.
The source gives a formula as well, and it ends in one word worth stopping on. Even a person who reaches the floor only barely maintains their standard of living. The floor is the minimum at which you still hold on, and it is hard to call it a good position.
Suppose a graphic designer wanted to take home $6,000 a month, and her business turned over $8,000. She worked eleven-hour days, was permanently short, and could not see why.
After she raised her prices and reached $28,000 of turnover, she worked the same hours and the shortfall disappeared.
Earning exactly what you spend feels like balance, and the booklet treats it as the long road to insolvency.
What changes when you have staff
The source extends this law from one person to a group, which matters most in a business of three to ten people. When some members of a team do not produce valuable final products above their own standard of living, they lower the standard of living of the whole team.
The source's verb here is a strong one: they depress it. They pull everyone down, since what they use up is paid for by the output of the others.
Suppose an office of four, in which two people produce and two assist. Pay across the whole office is squeezed, and nobody there can say what went wrong.
Now suppose that in the same office everyone is given a product that can be measured. Two of the four discover that their work produces nothing at all, and they move to work that does.
It is the same law at the size of a team. Everyone on the team has to produce above their own standard of living, and a person who produces only as much as they use, or less, lives on what others produced.
One law, three sizes
The installer, the designer and the office look like three separate problems: an engine that burns out in year two, a permanent shortfall despite eleven-hour days, and pay that gets squeezed with nobody understanding why.
The same law runs through all three. What comes in does not rise far enough above what goes out, and whatever is missing in that gap shows up differently each time.
That is why the whole chapter is built around one question: by what multiple must your business produce above what you take home, and why is one-for-one a trap?
The booklet gives this chapter two short exercises, one a calculation and one a comparison. It also holds the numbers the source gives for the surplus, and the formula itself.
Before you decide whether a month was a good one, find out how much your business has to produce above what you take home. According to the source, even the floor of that figure is a long way from one-for-one.
The booklet is general knowledge, not financial advice for your business.