Before you open the doors of your new business (be that a literal or metaphoric door if you are an online business) there are three numbers you need to have a pretty firm handle on even if they are not final.
They are numbers that people rarely think of when starting out in business but they are not hard to work out. Once you have a system to capture them they are easy to maintain and will provide information that will make managing your business so much easier and provide much-needed peace of mind.
You’ve heard the old saying that with knowledge comes power. This is a perfect example of that saying in action. There is so much uncertainty when you start a new business. People spend days if not weeks or months,
- Developing business plans,
- Working out how much it will cost to get the business off and running
- Building websites
- Brand development
- Business cards…….
……. the list goes on. It is a real roller coaster ride of optimistic highs and pessimistic lows, and in all the flurry it is easy to forget the three important numbers that you need to calculate the size of the safety net to keep you and your business going in good times and bad.
In fact, after more than 20 years spent working with business owners, I am amazed at how few people know even one of these three numbers (even more so for the second number).
Ok, so I know you are bursting to find out what they are, so here we go:
- How much do you need personally to live on each month?
- If push comes to shove, how long can you work without being paid by your business?
- How much money do you need each month to keep the doors of your business open?
Now stop shaking your head and saying to yourself what a pessimist she is. My business is not like hers (or the hundreds of other small businesses) I’m going to be rakin’ it in from day 1 baby! In fact, I have already chosen the Porsche I’m leasing as soon as my ABN comes through.
I only have two things to say to you,
I’m an accountant – would I have chosen to do that if I was an optimist by nature?
You will be grateful I am a pessimist once you get to the end of this post
How much money do you need to live on each month?
You might say, well the job I’ve just quit to start this business paid me $75K a year plus super, and that’s all well and good but we need to get a little more precise than that. So grab your laptop or a sheet of paper or whatever works for you and set up columns for the months of the year and a total column.
Then start listing your expenses under three headings
- Must spend – or If I don’t spend this I will be homeless and malnourished
- Would like to spend – or If I don’t spend this I will be a very sad person with a roof over my head and food in my tummy but very still very sad
- Luxury – or If I don’t spend this in the first year of my business it really wont matter because I will be so busy working I won’t even notice it
So category 1 will give you the bare minimum you need to keep yourself afloat each month and anything on top of that will be a bonus. (Depending on how you remove that from the business there may well be tax and superannuation liabilities to add to that but that is for another post).
Which category you put things into is entirely up to you. What is a luxury to you might be an absolute necessity to me (like my daily large flat white that is very flat and very hot – why do they put fluff on flat whites – but that is a topic for another day!) The important thing is to get all of them down as best you can – guessing is fine if you don’t know exactly – you can refine it as time goes on.
How long can you survive without drawing money from your business?
I know you hope your business will be raking it in from day 1 but in my experience very few do. You will be wise to start your business having saved up a safety net of funds that you stash away to live off.
The exercise above will give you a good idea of what you need but the size of the nest egg will depend on other factors such as;
- Are you the sole breadwinner for your family or do you have a partner who is still earning a steady income and is that enough to keep the family going if you don’t earn anything from your business in the first few months?
- Do you have a part time job that you can maintain during the initial launch phase of your business?
- Are you able to pick up casual work if your business doesn’t boom straight away?
Once you have the answers to these, you will know how long you leave the money the business is earning in the business thereby building a business cash safety net.
How much do you need to keep the doors of your business open?
Getting the hang of this now?
It’s one thing to start a business, but it is another thing to keep it going. Generally speaking every set up expense will cause a recurrent expense and keeping track of those expenses will help you work out how much you need to have to operate your business each month.
For example, you get an internet connection installed and pay the set up fee but now you will be up for a monthly charge and it is that recurrent expense that we want to keep track of. Some people wait until their bookkeeper enters the information into their accounting system but that is a bad idea for two reasons:-
- It puts you behind the game – particularly if you don’t get your books done until your first BAS is due
- Looking at what you have spent won’t necessarily be a good indicator or what you will need to spend – especially in year 1 of your business when you will have a lot of set up costs as well as recurrent costs.
So grab the spreadsheet you set up for your personal budget and copy the structure for your business recurrent costs spreadsheet. Change the headings to groupings that suit your business and start listing the recurrent costs.
Once you have this setup commit to the discipline of maintaining it and you will know how much cash you need to keep the doors of your business open each month.
Ok so now that you know how much you need to live on, how long you can survive without raiding your business for money and what the monthly recurrent costs are for running your business, you know what sort of safety net you will need if your business takes a while to take off or hits a few bumpy patches along the way.
Every small business needs a safety net of some kind and for some that is access to debt through credit cards or an overdraft facility whilst others have cash available either through personal savings or loans from loved ones that they use until the business is self-sufficient.
Regardless of how you fund it, knowing those three numbers will provide you with a level of security that I promise will make the annoyance of having to pull it together worth it.