the value-to-income ratio

Summary

profit is the metric everyone tracks. it’s not the metric I trust. the one I actually pay attention to is the value-to-income ratio, or VIR.

VIR is the value you create per hour divided by the income you take home per hour. it tells you how much leverage you actually have between what your business produces and what ends up in your pocket. profit can hide the truth. VIR can’t.

most service providers convince themselves their hourly rate is what their time is worth. it’s not. there’s an iceberg of unpaid hours, admin, marketing, sales, ops, hiding underneath. when you do the real math, the hourly rate looks very different.

four ways to improve VIR:

1. work more hours (the worst lever, but it’s the one most people pull first).
2. earn more for the same effort (price increases, better positioning).
3. earn the same for less effort (systems, delegation, removing yourself from delivery).
4. multiply the value you create per hour (leverage, scale, building assets that work without you).

the goal is to stop trading time for money and start tracking the ratio between the two.

Transcript

introduction to the value to income ratio and its significance

The most impactful business is the business that genuinely improves another human, a better human business. And to grow a business like this, you have to continually improve yourself. This podcast is a documentation of that thesis, scaling businesses and also personal growth. My goal is for you to shortcut this journey.

explanation of why hourly rates don’t reflect true income

So if you’re ready to try hard, subscribe. If you like what you’re hearing, please share and enjoy. All right, let’s talk about something you can track this year instead of profit alone to take more money home, grow your business and become a better business owner and a better human. This is the better human business podcast.

I’m Jerred Moon. And today I’m going to be talking about the value to income ratio. It’s a ratio I’ve used with a lot of people over the years. I’ve tracked it myself. It’s something that I try to keep an eye on because it is really important and it can truly shine a light on your efficiency as a business owner.

And really it can. Once you learn how to optimize, once you learn how to play around with the variables, you’ll start to realize how you can actually earn more money and have more freedom. So one thing that frustrates me, and I work with a lot of service based providers, meaning they provide a service for their time.

breakdown of calculating your working days and hours

One thing that really frustrates me is when they get in this mindset of what their time is worth. Because what you charge hourly is irrelevant. That’s not what your time is worth. And that’s how a lot of people think. They’re like, okay, I saw this client, I saw this patient, I saw this athlete and they, you know, for the one hour that we worked together, it was 200 bucks.

So your time is worth $200 an hour. But okay, how about when you shut the doors or you’re not doing that thing and you’re getting a followup email or you’re running payroll, who’s paying you 200 bucks for that hour? The answer is nobody. Nobody’s paying you for that hour to do all the other things that it takes to generate the income.

And so when you actually calculate all the revenue that you’ve made versus the hours you’ve put in, it’s not as pretty as people like to make it out to be, but they think anything that they do should be worth that amount of money. But really that’s not the value you create because you know, it’s actually pretty sad in the beginning and it’s okay.

how to calculate your personal hourly income

It’s sad for everybody in the beginning because you’re putting in like 15, 16, 17 hour days, you know, all for, you might even work weekends, you’re working all these days, all these hours. And if you were to calculate some of the things that I’m talking about at the very beginning of your business, you might be like, wow, I make like $8 an hour.

I could go get a job basically anywhere else and make more money than I am right now. And it’s true, but it won’t always be true. So that’s why you need to keep at it. I actually think this would be something really cool to track. I wish I would have tracked it to the beginning to see this like go up over time.

So even if you are listening to this as a beginning business owner, go ahead and start tracking it. And whether you are more advanced, whatever, I think everybody should track this. So I’m just going to get right into it again, why you should track this over profit. So here’s the deal, there are 365 days a year, right?

discussion on the difference between business value creation and personal income

And first thing you need to do is calculate how many days off you have. The first thing that we’re trying to do is find out how much you make per your time. And we’re going to do this based off of averages. We’re not going to like clock in and clock out every day and log it all. That’s just going to be too much.

So there are 365 days in a year. Now go count how many days off you had last year. And I’m talking about every single day that you’re not working. So if you don’t work Saturdays and Sundays, you count those days. Any vacation time, travel days, any days that you’re not working, you count those as days off.

So if there are 365 days off, I have an example here for you, say you had 149 days off. That might sound like a lot, but when you’re counting weekends, it adds up pretty fast. So if we’re now calculating our working days, we’re going to take 365, we’re going to subtract our days off, 149, and we’ll have 216 days that we worked.

detailed steps on calculating the value to income ratio (VIR)

Now we’re going to average out how many hours work per day, and this is going to be different for everybody, right? Some people work a lot. Again, just take what you think your best average is. Nothing has to be perfect, but let’s say you work on average seven hours per day. This would be, let’s say this accounts for the five hour day when you had other stuff going on and the 14 hour day in the nine hour and the three hour.

Like let’s just say you average seven hours of work per day. So we have 216 working days, averaging seven hours, that’s 1,512 hours worked. Now let’s say your personal income, I’m going to use a big number here. Let’s say your personal income was $1 million. That’s not what your business made. That’s what you actually took home.

You took home a million dollars. So what is your hourly value? Well, you take $1 million and you would divide it by the hours, 1,512, and you’d have $661 per hour. So do you see how big your income needs to be to hit like a $661 an hour? So when people tell me like they’re worth $300 an hour, $400 an hour, I’m like, are you though?

strategic ways to improve your VIR

Like really? How much did you take home? And we talk about personal income. I’m talking about like, what did you actually take home? This is not profit in your business. This is if you handed me your income tax return, your personal income tax return, what are you reporting to the IRS? Like what did it say that you made?

And if you’re like, well, yeah, but my business pays for the cell phone and I need to add that back. Cool. Do all those small little things to add like the nickels and dimes back. But most of you are most likely reporting most of your income to the IRS as you should be. You don’t have like all these advanced strategies to hide 50% of your income, you know, without doing something illegal.

So basically you can just take whatever you reported to the IRS. If you want to put more time into this, you can go like do some ad backs. If the business is paying for your car or if it’s paying for your phone, you could, you can add those things back. That’s fine. But ultimately in this example, your time is worth $661 per hour.

personal insights and experiences with tracking VIR

But let’s go. Now that’s, that’s what your time is worth. Everyone should know what your time is actually worth. Now in the same example, let’s say you had to make $3 million in gross to take home personally. 1 million. Okay. So now we’re going to calculate what your value is. So this is more what people like kind of, they want to do when they think that their time is worth a lot.

So if we may, if we made it as a business $3 million and I put in the same amount of work, 1,512 hours, that’s $1,984 per hour. Okay. So I’m creating nearly $2,000 of value per hour. This is different than what my time is worth. That is the value creation. Value creation side is nearly two grand per hour.

But what I’m actually taking home $661 per hour. So once we know those two things, you can start to track your value to income ratio, your VIR, V-I-R. So we already, I already told you how to do part one and part two. There’s three parts. First, you’re going to find out what your time is worth, your income per hour.

closing thoughts on financial freedom and the importance of tracking VIR

I went over that very easy to do. Then we went over how to create your value per hour, total business revenue divided by total hours worked, got that. Now to calculate your V-I-R, you’re going to say value created per hour divided by income per hour. So in this example, it’d be 1,984 divided by 661, which is equals three.

Now you could have skipped a step here and just done 3 million divided by 1 million, right? But we’re trying to find out what our hourly is. It puts it in a better perspective. And so value created per hour divided by income per hour. So 1,984 divided by 661, that is three. So you have a V-I-R of three and it indicates that for every dollar you take home, you create $3 of value.

And it shows the leverage you have in turning value creation into personal financial reward. Now why I want to track this or have you track it over tracking profit. Like I want you to continue to track profit, but as a business grows, and I’ve talked about this before, I really want people to track home, track what they take home, but also the value of their creating in their business.

So it’s a combination of the two. It’s like how much value, because that’s all income is, right? It’s value income. The more income you make, the more value you’re creating, either more value for an individual or more individuals are getting, receiving a lot of value. That is how you are ultimately expanding that number.

You’re increasing value. You’re getting money for that value. And then you’re getting money for your time. But what this really does is helps you now, if you want to play with it, you’re like, okay, well I want to get a better V-I-R score. This is where it really impacts and hits hard because there’s only four ways that you can do it.

There’s only four ways that you can increase your value to income ratio and you can do what most people want to do. You can work more hours and make more money. And so what you do here is if you’re like, okay, well I was working seven hours a day. I want to work eight hours per day and I want to make more money.

But you risk when you do that, keeping your ratio the same. Because if you go up in both categories, like you add 10% more to your hours worked and you add 10% to the overall business revenue, like you’re going to end up being the same. But this is where most people want to go. They want to work more hours to make more money.

And working more hours normally makes you more money, but sometimes the V-I-R score is not improving. So it’s like, well, your value to income is still sucks or it’s not changing. So that’s one thing that you can do. And another thing that you could do is just make more money, right? You can just make more money.

Put in the same level of effort, no additional hours. And you could say, hey, I’m going to make more money this year because I’m smarter. I got better strategies in place. Like I’m just going to make more money, but I’m not going to put in any more time. You do utilize leverage to do that, right? You know, leveraging your time in whatever way you can.

Making sure you’re focused on the most prioritized tasks because we’re not necessarily hiring more people in that situation because we just want to make more money. If we want to make more money, hiring a bunch of people might reduce your profit. And so you could do that. But then there are two other options.

One is work fewer hours, right? You could work fewer hours in this equation to have your V-I-R increase, especially if you’re making about the same amount of money at least, and then you’re working less. You see how all of these have, like I’m giving you the direct thing you can do, but there’s so many implied tasks when you start to play with this equation.

So if you say, hey, I want to work fewer hours to increase my V-I-R, well, you absolutely can do that, but you can’t just work less and make the same amount of money. So it applies leverage. It applies focus. Maybe there are employees that need to be hired and you need to calculate these things out.

So you could work fewer hours. Now this is like one of the only equations in the world that I know of that’s like, hey, maybe to get your V-I-R to increase, you need to work less. And now your value to income is increasing because ultimately your income is increasing per hour and you’re becoming more leveraged in the tasks that you’re creating.

And then the last, the final, the fourth one that you can do is make more money plus work fewer hours. That’s the ultimate, right? That’s the hardest one to achieve. I want to increase my business by 50% this year and I want to decrease the amount of time I put into it by 25%. Boom. That’s huge. That’s a, that’s a good question to even like focus on.

Like how could I work 25% fewer hours and make 50% more money? That’s a question you could sit around with for weeks and try and map out how you could make your business more efficient, how you could hire the right people, how you could focus on the right tasks, how you could stop wasting time doing things that don’t matter.

And you see how when you’re tracking this, it just keeps everything in check. It’s not just one or the other. It’s not just, can I cut expenses and increase, you know, gross revenue? Because that’s all profit is doing. It’s like, okay, I want to make more money and I want to spend less. I want to make more money and I want to spend less.

And you know, ultimately profit will, will help you here and what you take home. So you want to track profit. It’s an important metric. But when we’re talking about living a better life, becoming a better human and having a business that gives us ultimate lifestyle freedom, financial freedom, VIR, value to income ratio is what you want to track because it’ll make sure that you keep in check how many hours you’re working, how much money you’re making, and making sure that you’re not just chasing the more hours, more money hamster wheel that will, will never ultimately work out in the long run.

It keeps everything in check. And my favorite thing that it makes you do is if you ultimately want to go with one of the hardest ones, I want to make more money and work fewer hours. It makes you think, it makes you think you have to sit around and think about how your business could be different, how it could be more efficient, how you could do things in a different way, how you could leverage your time in a different way.

It makes you think differently than the service based mentality, which is work more hours, make more money, work more hours, make more money. That is an old, old idea and it’s been played out and it won’t work out forever and it’s not a game that anyone wants to play long term. So this year, track your profit, but also track your VIR, your value to income ratio.

Come back to this podcast if you need to figure out how to calculate it, but track this one each and every single month and see if you can improve it as the year goes on. To do that, you’re going to have to try harder.