I just wanted to write an article to help people who may struggle with the task of business planning & how to price what they do. The following are very broad principles, but I’m happy to write something more specific if anyone has questions.
You’ll need to heavily adapt this to suit your specific circumstances:
- Map out all your existing personal expenses;
- If you’re on a tight budget (& seeking financial investment in your business or project) this is especially important;
- The more $ you need from a financier, the more you sacrifice in control & ownership, as your need weakens your bargaining position (assume they’re all smiling assassins until they prove otherwise);
- NOTE: if you do need to give away more control after all the following (& more) steps of your business planning, maybe that’s a good thing … but make sure your investor is bringing skills to that table along with their money, AND vet them as diligently as they vet you (there’s plenty of stupid, foolish & even delusional people with money in this world, and you don’t want to get stuck with one as a partner with influence, no matter how much money they put on the table);
- Be extremely critical of your expenditure, but allow yourself enough comfort to preserve your sanity … you can’t run a successful business if attempting to do so causes you so much stress, you can’t think straight (vital not to let negotiations undermine these concessions you’ve made to your own sanity, stand firm … and most importantly, be ready to walk away from the negotiation table, you’ll regret it if you don’t);
- EXCEL SPREADSHEET: the way I usually go about this is creating general sections like food, clothing etc., then breaking these down into subsections (eg: clothing > casual, business, sports), then breaking these down to line items (eg: casual > shoes, socks, shorts etc.);
- With each category we can make sub-totals, and with each line item we can make a unit price & a frequency of purchase, which in turn allows us to see where our money is going, over what time periods, and on what schedule … with some clever excel work, you can turn this into a variable schedule with a minimum and ideal level of expenditure in terms of frequency, and thus you know exactly where you can make what sacrifices along the way if you hit trouble & need to tighten your belt;
- Make sure you save it as a template for repeat use;
- Now I want you to make 3 personal expenditure sheets (within the same excel file) based on this template (or you can achieve the same objective by using some clever excel tricks … your call):
- MINIMUM: think about the level of personal sacrifice you’re willing to make over 5 years, and fill out your personal expensive based on this level of sacrifice;
- EXISTING: what do you spend right now that isn’t waste but also isn’t too much austerity to impose on yourself?
- DESIRED: what is the lifestyle of personal expenditure you hope to achieve as an ideal scenario?
- IN SUMMARY:
- immediately cut back waste;
- know what level of sacrifice you’re willing to make;
- know we’re you’re headed, and;
- If you’re not there or very much on the way (within that 5 years), decide if you want to bail out.
- Do the same for your business expenses, but be extremely cautious about overestimating what you can do alone … the likelihood is, if you end up with a total 5 year budget under $5M you’ve made a mistake (unless your project is very small) … because you need GOOD staff, equipment, maintenance & replacement of equipment, licenses, insurance, premises for operations, and so on … these things add up.
- Where you’re looking at the lifespan, maintenance & replacement purchasing cycles for capital equipment, and other productivity investments like training, get advice (or do research) on how to tie these expenses to advantageous taxation rulings, plus also look at government & private grants for R&D etc.;
- Using the existing (non-wasteful) expenditure budget for both personal & business expenses, create a total annual revenue required, which means:
- Pre-tax revenue;
- Profit margin on expenses & projected sales (realistic / conservative sales growth);
- Hourly rate &/or unit price required, if no passive income or alternative revenue streams exist (or if such alternative revenues are for some reason temporarily inaccessible);
- Your price competitiveness will depend on (if you’re in a competitive industry) finding passive incomes & alternative revenue streams, such as to bring down the hourly rate or unit price of your products/services, but don’t undersell or underestimate your value;
- IF YOU HAVE NOT BUDGETED FOR A SALES PERSON (a real one with actual skills willing to go the hard yards for you), you’d better have a really good reason … and if your business or project is not a massive potential money spinner (off which they can make some serious cash), then you’re probably going to have to learn to do it yourself AND YOU SHOULD NOT BEGIN UNTIL YOU DO SO OR HAVE HIRED SUCH A PERSON! Seriously, without sales, you’re dead in the water … so know what you’re doing on this score, don’t just assume the sales will be there because you believe in your idea and you’re excited about it, that’s not a valid reason;
- Map out all other minimum business competencies and be absolutely sure that you’ve allowed for everything in your team, ESPECIALLY who will run your business in your absence if you’re sick, busy, or some other unexpected circumstances arise … you need a contingency plan for this;
- What is your contingency for any gap between existing and required competencies in your absence? What is the protocol that should be followed if you’re unreachable? Don’t leave your staff floundering!
- If no one else has your skill set, how will you replace yourself via training up an assistant?
- FINALLY: before seeking investment, have a think about your competitors, and based on your research of them, ask this: how can I turn them into at least partial allies, and make the value of that alliance greater than the value of aggressive competition & anti-competitive (predatory) practices (?) … especially where you’re the small fish … ALTERNATIVELY: how can I turn other small fish into a network of alliances (?). There’s risks involved in both, but you must at least ask these questions … it’s not about collusion or price fixing, it’s about finding niches which reduce your business’s competitive stress.
CONCLUSION:
- Personal + Business (time-dependent) variability of expenses & revenue, adjusted for government grants, taxation & other modifiers = difference between existing & required resources, thus investment;
- Know your numbers well so that you have a strong bargaining position, and weigh up the options between loans & investment partners, to ensure you keep control of your enterprise;
- These are very broad & general points as I said … but the idea here is to stimulate thinking about the purpose of business planning and strategy;
- Your goal is ultimately to be sure you have a financially & strategically viable business model, and one that won’t turn your passion into something you end up hating with a passion;
- There are a great many more points I could make, but if you want something more specific on the subject, just write to me & I’ll have a think about it, then write a follow up article on that topic (if there’s enough interest).