Our April 27th blog – Key questions to consider when planning your business – introduced four questions. Previous weeks have covered “Who’s your customer?”, “How will you reach your customer?” and “How do you get paid?” Today’s final installment tackles the final question “What’s your personal financial goal?”
Money is the most important factor for driving business. No matter what other ambitions you have for prestige, flexibility, philanthropy or control; money is what enables the business to start, continue and grow.
Every entrepreneur needs to identify two specific numbers during the planning phase for a new business. What amount of money do you need to survive and what salary or drawing do you deserve?
The technical process of paying the owner will vary depending on the legal structure of the business, but from a practical perspective, setting the budget is important for every type of business structure.
What amount of money do you need to survive?
Too often entrepreneurs ignore their personal needs in their business plan. They focus on making the projections look as affordable as possible and don’t always consider themselves an expense. Entrepreneurs have households to run and personal needs for food and basic entertainment just the same as a person working in more traditional employment.
Set a realistic minimum budget, and then use this ‘draw’ in the calculation of your business’ break-even point.
What salary or ‘drawing’ do you deserve?
You are allowed to want to make money. You have put in money and effort and taken risk. When the business is profitable you deserve to be compensated for your efforts. You should identify how much money you would want to draw should the business be able to afford to pay you what you’re worth.
Start by identifying how much you would earn as a salary if you were to do a similar management job for an employer, then declare the amount you would want to be able to draw. Compare this target with the business’ capacity; specifically identifying if it is possible to reach the right combination of high sales and low expenses to eventually allow this draw.
Why not just start with what I deserve?
A cash-flow projection worksheet is an important tool for assessing the potential in a business model. By providing the projected sales by month, direct costs of goods and general overhead expenses, the worksheet’s cumulative cash flow line shows if the business can grow financially, or if it is going to struggle and decline until there isn’t any cash remaining.
The risk to skipping the “need” amount and using the “deserve” amount in a projection worksheet is that the projection could be crippled by only the owner’s salary expense. You may appear to be planning a business that will lose money, when really it could be capable of performing well enough to pay your minimum, and grow from there.
Money enables a business to survive and grow, and allow an entrepreneur to live safely and then live well. Defining these numbers is a key to business planning success.
Consultants at the Halton Region Small Business Centre are available to meet with current and perspective entrepreneurs for free. Topics identified in this article, including break-even point, capacity, cash-flow projections and legal structures of businesses can all be discussed. Book your appointment by contacting our centre.