Making Millions and Still Broke? The Financial Trap Every Founder Faces

It often starts with a simple passion. Maybe you don’t have a cat, but you have an idea—a brilliant, exciting one that keeps you up at night. For a man we'll call Alex, it began with a fancy cat. This wasn't just any cat; it was an investment, a companion, and the spark for a new venture. What started as a whimsical purchase soon required a whole ecosystem to support it: premium food, a state-of-the-art litter box, toys, and grooming. These weren’t just cat expenses; they were the initial, unnoticed costs of a budding enterprise.

Alex’s charm and his cat’s pedigree led them to success at a show. Suddenly, sponsors were interested, and an idea blossomed: an online course on achieving "successful success" with a prized pet. Alex poured money into production—scripting, filming, and ensuring his feline star looked its best. The course launched, and with a savvy marketing push across social media and search engines, sales skyrocketed. With money pouring in, he hired staff to manage the course, freeing him up to create the next one. He went to pay for the new production, but when he checked the account, he was met with a deafening silence. The money was gone.

Sales were incredible, so where did it all go? This gut-wrenching moment is familiar to so many entrepreneurs. It’s the paradox of being cash-rich but fundamentally broke. It’s the moment you realize that earning money and managing money are two vastly different skills. Overwhelmed, Alex knew he couldn't continue operating on vibes and blind optimism. He needed a system.

The First Rule: Plan Your Expenses Before You Spend

The foundational insight he discovered was deceptively simple: to prevent money from vanishing, you must give every dollar a job before it gets a chance to wander off. This means creating dedicated funds for your expenses and allocating all incoming revenue into these funds first. Only then can you spend money, and only from its designated fund. It’s like creating envelopes for rent, groceries, and utilities at home, but for your business. To do this effectively, he had to understand where his money was actually going by breaking expenses into three distinct categories.

Category 1: The Essentials (Direct Expenses)

These are the costs without which your business immediately stops functioning. They are directly tied to your revenue. If you run a clinic, it's the doctors' salaries. For Alex, it was the income tax on his revenue (a non-negotiable 7%), the fees for his course curators who delivered the service, and a small percentage for performance bonuses to keep his team motivated. These costs are the lifeblood of the operation; cutting them means cutting off your ability to do business.

Category 2: The Safeguards (Variable Expenses)

This category contains expenses that prevent the business from collapsing under pressure. While not directly tied to each sale, ignoring them leads to inevitable crisis.

• Founder's Dividends: The business owner bears the ultimate risk and solves the biggest problems. You must be compensated for that. This isn't just a salary; it's a share of the profits that makes the entire endeavor worthwhile.
• A Reserve Fund: This is your business’s safety cushion. This money is sacrosanct, to be touched only in the face of a true existential threat, like bankruptcy. It's not for covering a bad month or buying inventory. This fund can be used strategically to acquire stable assets, but its primary purpose is survival.
• Other Critical Payments: This can include other taxes or payments that, if missed, won't stop production today but will certainly lead to a forced shutdown down the line.

Category 3: The Growth Engine (Adjusted Income)

After all the essential and protective obligations are met, the remaining money is your "adjusted income." This is where you invest in the future and the quality of your company’s life. Without these expenses, the business won't fail, but it will stagnate.

• Company Goals: This fund is for strategic growth. For Alex, this meant advertising—the very engine of his sales. It also included upgrading equipment for better broadcasts and financing the creation of his next course. This is also where the "wants" live—new office furniture, a better coffee machine, or even a shower cabin. These are important for morale and long-term vision, but they are discretionary.
• Conditionally-Fixed Expenses: These are the regular overheads that don't fluctuate much with sales. Think office rent, accounting services, software subscriptions, and utilities. They are "conditionally" fixed because you have some control over them; you could move to a cheaper office or survive without the gourmet coffee for a month if needed.

Working Backwards: How Much Do You Really Need to Earn?

Once all expenses were categorized, he could perform a kind of financial alchemy. Instead of just hoping for more revenue, he could calculate the necessary income level—the minimum amount the company had to earn to function and thrive. The process works in reverse, starting from the least flexible expenses and building upwards.

1. Start with Category 3. Add up your conditionally-fixed expenses (rent, software) and your company goals (advertising, new course budget). This sum is your target "Adjusted Income." For Alex, this came to $770,000.
2. Calculate Marginal Income. His variable expenses (founder’s pay, reserves) amounted to 23% of his marginal income. That means the $770,000 he needed for Category 3 represented the other 77%. By dividing his adjusted income ($770,000) by its share (0.77), he found he needed a marginal income of $1,000,000.
3. Determine Total Revenue. Finally, his direct expenses (taxes, curators) were 20% of total revenue. Therefore, the $1,000,000 marginal income represented the remaining 80%. By dividing his marginal income ($1,000,000) by its share (0.80), he arrived at the magic number: $1,250,000.

This was the company’s necessary income level. Any amount of money coming in would now be automatically distributed according to these percentages. This system ensures that growth expenses in Category 3 can't steal the money needed for taxes in Category 1. It brought order to the chaos. The problem? His average revenue was only $850,000.

When Reality Bites: How to Trim the Fat, Not the Muscle

Knowing your necessary income level is powerful because it forces you to confront reality. If your earnings don't match, you have two choices: earn more or spend less. When you need to cut costs, the system provides a clear roadmap. You start from the bottom—the least critical expenses.

Alex looked at his list. He couldn’t touch his advertising budget; it was essential for clients. The new equipment was also necessary. But the new tables and the shower cabin? Those were wants, not needs. He postponed that expense, deciding to fund it only when sales exceeded the plan. This single decision significantly lowered his necessary income. With a few more small trims, he reduced his necessary income level to $1,000,000—a much more attainable, yet still ambitious, goal.

By embracing this structured approach, Alex learned to control his money instead of letting it control him. It’s a pity his cat never learned a similar lesson. The little rascal promptly broke the new plasma TV in the office—a perfect reminder that chaos is always lurking. But with a solid financial plan, even unexpected catastrophes become manageable bumps in the road, not business-ending disasters.

References

• Michalowicz, M. (2017). Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. Portfolio/Penguin.
  This book provides the direct framework for the system described in the article. It champions the idea of allocating income to predetermined bank accounts (for profit, owner's compensation, tax, and operating expenses) the moment revenue comes in. The core principle—taking profit first and forcing the business to run on the remainder—is a revolutionary shift from the traditional accounting formula. See Chapters 3 and 4 for a detailed explanation of the core methodology and account setup.
• Crabtree, G. (2011). Simple Numbers, Straight Talk, Big Profits!: 4 Keys to Unlock Your Business's Potential. Greenleaf Book Group Press.
  This work reinforces the importance of focusing on key financial metrics in an accessible way. It strongly advocates for paying the owner a market-based wage, separate from profit distributions, which aligns with the "Founder's Dividends" concept. It helps entrepreneurs understand their true profitability by looking beyond top-line revenue. The discussion on labor efficiency as a percentage of gross profit (see Chapter 5) provides a practical way to manage one of the biggest costs in a service-based business.