6 second take: Knowing the true price of starting a new venture, and taking steps to keep operating costs affordable, will help you far into the future.
Founders start businesses fueled by a passion that makes them willing to invest a substantial amount of time and savings into getting it off the ground. At the same time, one of the very last things on the mind of someone just starting their new venture is financial planning of their new business.
Instead, it is typical to think about money in terms of collecting receipts in a shoebox in case you need them one day for taxes or worse yet, not thinking about the money part of your business at all.
Tracking expenses for taxes is enough of a reason to stay on top of financial reporting even for the smallest of new businesses. But even more important is that the numbers — if you spend time analyzing them — can tell an informative story that includes details that can help you make profitable decisions along the way.
When you’re first starting out, you don’t have any actual business numbers to analyze, so your job is to estimate these numbers to help make decisions that lead to a profitable business.
This will be easier for some founders than others. Some founders don’t believe they are “numbers people.” My advice is to throw that out the window if you’re starting a business.
From now on, you need to know enough about the numbers to know they’re right and make sense. After that, you can outsource if you choose.
The process of estimating and analyzing can lead to clarity about some of the most important aspects of your business plan and can be the difference between making money or not.
Here are five steps to take as a new business owner to map out your initial plan by using financial analysis that will enable you to craft a well-thought-out launch plan.
Step 1: Understand Your Start-Up Costs
You have a great idea for your new business. How much will it cost to get it to the point where you can sell something?
For example, if you want to create an online service that helps new artists connect with art buyers, you know what problem you’re solving and how.
But maybe you haven’t worked out how you’ll get paid for the service. The expenses involved may be related to hosting a website with the art as well as marketing to build a list of buyers and a list of artists. Map out all of this in a spreadsheet with your estimated budgets:
|Source of Funds:|
|Marketing to build community||$10,000|
This exercise can easily be built into a pro forma profit and loss report, which will show you right away how much money you need to make to cover these costs, ongoing estimated costs, and a salary for yourself. Here is a template you can use to build this out.
Put This Into Action
What are the expenses you expect to incur in your start-up phase? What will be the sources of your start-up cash? What costs will become recurring once you launch?
Step 2: Understand Your Revenue Model
One of the first things an owner must do is figure out how their idea is going to make money. Often, the revenue model is not clear at first. You notice a problem.
You know a solution that could solve the problem, but you aren’t sure who would pay for what to make it all possible.
By understanding your recurring costs from Step 1, you can start to gauge how much money you need to earn to cover those financial costs — and plan your business accordingly.
This information coupled with the number of customers you anticipate converting in the first year can lead you to estimate how much money you must earn per customer to be profitable.
From here you can begin to brainstorm various revenue models that may work for your offer and target market. Examples are subscriptions, product sales (e.g., actual products, books, etc.), memberships.
Continuing the example from Step 1, perhaps you take a commission on each piece of art sold. Also, you can allow users to buy one art piece per month for free. If they want to buy more, they may need to pay a membership fee.
Put This Into Action
What pricing models do your competitors use? What other models would your target market easily understand and accept? How many customers do you expect to buy in the first year?
Step 3: Determine a Pricing Strategy
Once you determine how you’ll make money, you can further dive into how you will implement your pricing strategy.
In the template above, there is space for mapping out your assumptions in the Notes. Use this white space to play around with various scenarios of different pricing structures (e.g., low vs high), upsell opportunities, freemium versions, and bundling.
How many artists can you get in Year 1, and how many pieces of art will they produce at what average price? Mapping this out will help you see opportunity or realize something will not work.
Put This Into Action
Populate your pricing strategy assumptions into your Year 1 profit and loss report along with the recurring costs to get a feel for what you need to accomplish in order to break even.
Step 4: Determine Your Cash Flow Needs
Not all sales result in up-front cash. Some sales come with terms that allow clients to pay in 10, 15, 30, or even 60 days.
If you accept credit card payments, you may have to wait anywhere from two to seven days to receive the cash.
If you know that you’ll have to wait to receive this cash, you’ll want to factor this into your cash flow analysis and figure out which of your own expenses you can also delay while you wait to get paid.
Put This Into Action
When will you get paid in the most likely pricing strategy you plan to launch with? If you need a credit card or line of credit, where can you get one?
Step 5: Determine Your Plan
Now that you’ve estimated how many customers you will sell to in the first year and have a pricing strategy to test out, you have enough information to take a stab at building out your initial sales plan.
If this is a new business, do you already know where to find your first paying customer or are you still looking for them?
If you created an offer around a known customer who has a specific need, work very closely with them to understand that need well so you can replicate this and find other customers like them.
If you’re still looking for the first paying client, use your knowledge about your ideal client and invite them for a conversation to kick off the sales process.