As a person moves from living on a paycheck to starting a business the cash management changes. This is one of the most stressful times a business owner encounters. Many live hand to mouth. For most once the money comes in you spend it on what is needed immediately for business or for personal needs. To survive past this initial state a system can help build a solid financial foundation.
Here are the basic steps I used to get started:
- Determine how much you need to live each month. Plan on taking that amount out of the business monthly or weekly. Pay yourself first. How much will it take for you to get by? You need to survive through this and eventually the business needs to be worth your time.
- Determine how much you need in sales each month to cover your paycheck and operate business. This is considered your break even or the technical term “your nut to crack”. This takes a little more work to calculate. It will be unique for your business. You need to know a few pieces of information:
- What is your monthly overhead? How much cash does it take to open and keep the doors open each month? This includes rent, telephone, insurance, software costs, etc. and your pay. The lower the amount, the less sales you need.
- How much of your sales goes to overhead? For example, if you sell a service 100% may go to cover, but if you have to hire contractors to get the work done or sell products maybe only 50% goes to your overhead. This is called gross margin or gross profit.
- Next, it’s math. Overhead $ divided by gross margin % = break even sales. If your overhead is $5000 per month and you keep 80% of your sales, you need $6250 in monthly sales to cover your overhead.
- Now that you know your sales goal it is time to brainstorm on how to meet and exceed it. Here’s some ideas.
- Focus on your ideal customer and service. Do what you do best. This will bring the fastest results and keep your energy flowing. Anything else will sap your energy and cost you money to meet their needs.
- Develop reoccurring sales. How can you provide value on a continuous basis? Sell them a Keurig, then sell them k cups. Sell them a product then sell them a warranty.
- Sell addons and upsells. Increase the sales ticket. Find other items your ideal client base will value.
- Document and refine your systems to keep creating great results. For me creating a sales system has saved me lots of time and has resulted in a consistent 20% growth over the last few years.
- Set weekly benchmarks and measure your success. Financial statements are great but it’s old news. Determine what actions have to take place each week to meet your sales goal.
I personally have found this to be the first step to moving to financial stability. Once you crack your nut, the same steps will increase your financial results.
Mary Guldan-Lindstrom, CPA