This summers blog series on Business Building was inspired by a talk I gave to the Long Island Food Council about planning and growing a new business. For every great success assisted by the Food Council, such as Eat Mud and Javamelts, there are dozens that have the desire and the drive but get overwhelmed by business planning. Among the cardinal sins I hear when speaking with upstart business owners in many fields—and even a few seasoned business owners—is, "I can’t afford to pay myself."
For the sake of your business, here's what you need to do.
Calculating what you need to make to pay yourself. I confess that for a long time I did not believe I was capable of running my own business. The security of working for a company or having partners at a firm helped me avoid that inner fear. But I also felt I traded my self-determination for this security. Ultimately my future seemed to be decided by someone else. When I made a full, no-turning-back commitment to start a firm of my own, I came up with a simplistic, non-threatening formula that helped me get started:
1) Determine what you want to make net of taxes (i.e., your take home pay); then figure out the gross amount of revenue you must earn to get there. Let's say you need $5,000 a month to pay your bills and live your life. Using general percentages, if you live in New York State add 8 percent ($571.43) in state and local taxes and 22 percent ($1,571.43) for Federal taxes. The total you must take in every month is $7,142.86, or $85,714.32 a year. Naturally, review the tax specifics with your tax advisor.
2) Next calculate the cost of any hires you will require. Let's say you find someone who can assist you at the rate of $20 per hour. Based on 2,080 working hours per year, that translates to a gross salary of $3,466.67 monthly (or $41,600 annually). Adding the $3,466.67 to $7,142.86 equals $10,609.53.
3) Finally, determine where you will work—an office or a commercial space. Browse the Internet to find how much square footage costs. Let’s say the rent equates to $3,500 a month. Don’t forget phone and high-speed Internet costs, say $250 a month. Add these numbers to the amount you need to pay yourself and a staff person—in our case, $10,609.53—and you find in this rudimentary formula that your business must produce $14,359.53 per month in gross revenue.
No doubt there are other costs I’ve excluded, such as insurance on the space, health insurance and other items. But for me, determining these basics helped me think about whether $15,000 a month of revenue was conceivable based on what I was offering to the marketplace.
Hedge your bets. It's hard to get a business off the ground and there will likely be unexpected costs or missed revenue targets. Ideally, have money set aside to help you get through without incurring debt. If you are still in the planning stages, squirrel away at least six to nine months of the revenue target now. Having $90,000 to $135,000 ($15,000 times six to nine months) in the bank without maxing out credit cards, cashing in your retirement plan or borrowing from friends and relatives will take a major source of stress off your shoulders.
Develop a plan to achieve your revenue goals. Simply put, what activities do you need to do to generate the amount the business requires to pay its fixed cost and you, the owner? We advise planning three years out. Once the three-year plan is in place, calculate how you will make 33 percent of that in Year One. Then break down the 33 percent into quarters for the year and determine what you will need to do each quarter to hit the 33 percent target. Finally, take the 90 days in the quarter and decide what you will do each day to bring yourself closer to the quarterly target. See in your mind’s eye how your business offering can produce satisfaction and repeat sales.
Don’t fall prey to shame. For those already in business who are barely getting by, it isn’t unusual to feel ashamed and depressed. The longer it goes on, the harder it gets. Pressure can build from family members who were empathetic and concerned initially, but then become pessimistic and angry. The problem is if you succumb to shame, others will pick up on it and doubt you – kind of like a self-fulfilling prophecy. Every business owner struggles. Get a third-party perspective if you need help figuring out your next steps.
Ideally, consider these issues before you launch your business or not long afterwards. The sooner you plan, the more likely you are to succeed in your business.
In our next blog, we will discuss the secret sauce for success: The Profit Margin.