Building on a prior post related to mentoring SCORE clients on preparing for the potential launch of a business, one of the key activities is that of “running the numbers.”
Running the numbers includes estimating, to the best of our ability, the:
- One-time start-up costs
- Ongoing expenses – the basic / fixed overhead costs to keep the lights on as well as those that are variable (i.e., will fluctuate with the volume of business and/or decisions that we make)
- Potential revenue we expect to receive. This step is based upon what we defined as our target market, which was covered in a prior post.
The obvious goal is to make sure that we are taking in WAY more revenue than the expenses we incur, so that we achieve a profit!
Now, let’s cover each of the above areas of “numbers” that we’ll want to run for a “service-related” business. This, as opposed to a manufacturing or distribution business, which have additional variables to consider.
These are the costs that will be incurred to get the business enterprise off the ground which can include, but are NOT limited to:
- Training, certification and/or licensing
- Tools, equipment and furniture
- Establishing a website
- Business cards
- Professional services in the areas of legal, accounting and finance
To be clear, we can pay as much or as little for ALL of the above as we want. Frugality is the key. To be clear, I’m not suggesting that we go cheap. I’m simply reinforcing the fact that the above does NOT have to cost thousands upon thousands of dollars.
These are the costs that will be incurred on an ongoing basis. Some will be flat or incrementally grow with the business (and inflation) while others will be completely variable based upon the decisions we make and the volume of business we do. These costs can include, but are NOT limited to:
- Insurance policies – professional liability, health and workers’ compensation
- Facilities – be it your home office or rented space
- Telecommunications – phone, internet
- Office supplies – printer ink, paper, etc.
- Travel-related – gas, parking, tolls, airline tickets, hotels, meals, etc.
- Marketing and advertising
- Labor – What we plan to pay ourselves and/or those we may employ or subcontract
- Our state’s annual corporate filing fee
Here is where, based upon the anticipated market opportunity, we project how much we plan to “sell” each month, quarter and year for the next 2-3 years. In projecting revenue, it is highly advisable to be very conservative (actually, low ball it) during the first several months of the business. And, then BEAT those numbers.
The process of running the numbers need not be overly complex and can be done quite simply in an Excel spreadsheet. And, some may ask: Where will I find all these numbers? The answer: You will dig for them. The answers can be found online, by calling service providers and just plain shopping around.
Why do I use the phrase “run the numbers”? Because, this is a never-ending exercise: each day that passes and contact we make presents new information, challenges and opportunities that will serve to adjust the numbers. And, during each iteration (review by yourself and/or with a mentor) these numbers will be tuned up and down, as necessary, to make them increasingly accurate and realistic.
Doing so will provide a solid set of guidelines from which to operate your business. That is, you’ll want to stay well within the expense structure and strive to beat the revenue numbers. The result: a profitable business!
I know, I know, some of the more sophisticated readers will say this is pretty basic stuff Craig. Well, yes it is. However, I have now been involved in mentoring several new SCORE clients and NONE of them had yet taken the step to run the numbers.
As such, we need to be sure to cover the basics!
All the best!
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The folks that do not “run the numbers” are behind the list of failed, bankrupt businesses that you read about in the news. This is so basic. Such an exercise (running the numbers) should be done by each family, often, to make sure you stay above water, and prepare for the future. It is so basic, it should be taught in high school.
For a family, I’d even suggest that “preparing for the future” should be first in “running the numbers”, and then “backing into” what is left over to live on. Nobody else cares about your retirement funds, so it had better be a priority as you start your working career; #1 in your “running the numbers”.
And, it never ends! Even in retirement, every month, the first thing that gets set aside from my retirement income is a fixed amount for savings. When unforeseen income is received, it doesn’t get spent. It goes into savings! When emergencies arrive try reducing your discretionary spending, then hit your savings.
So, keep “running the numbers” – and never stop!