End Financial Overwhelm: Reliable Results Just Need 3 Things to Balance
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It's pretty universal for first-time entrepreneurs to dream about success but also fear financial ruin. No one thinks of launching a business as particularly easy. Even I, who finds it super fun, acknowledge that it's never easy. But risk is something that can be mitigated. A well-thought-through business plan is the classic safety net for launching a business. And the financial plan within it is the most direct, concrete section. It's also the most imposing for those who are not a fan of math. And the easiest to skip when you're self-employed and no one's demanding to see your plan.
It's so important not to skip understanding your financials. It can become the difference between an affirming, spacious, thriving business and never feeling like your business ever will be successful. It's also never too late to take a look at them. Check in with your financials anytime you're feeling like you're working too much, earning too little, or wondering if you're charging the right amount. The formulas here work no matter what state your bookkeeping is in.
Your financials are more complicated than your hourly rate times the number of hours you work. Don't get me wrong, that's a great place to start! And that doesn't account for any expenses. Or admin time. Or that pesky self-employment tax. Let's take a smidge more time and get leagues' more accurate numbers!
Financial Planning From the Top
Let's start from the top down. The financial plan in a business plan shows a lender or investor the likelihood that you'll bring in enough extra revenue to pay them back. For self-employed businesses, we are the only lender or investor. We don't need an immense profit, but we do need to know that success is a possibility. Fun (terrifying) fact: a business can succeed while its financial plan fails. (Let's not be one of the unfortunate entrepreneurs who discover this fact!) When a business succeeds you'll have tons of clients and be working your butt off. But if the financial plan fails, then all that work doesn't result in the money you expect it would. To prevent this from happening, you need a solid financial plan as early in your process as possible.
Introducing the Trifecta
In a traditional business plan, the financial plan is where you outline your financial resources, needs, and forecasts. This is usually accomplished with a series of reports: 12-month Profit and Loss; Cashflow; 4-year Profit Projection; Break-even Analysis; Estimation of Startup Expenses; Personal Financial Statement. All these reports are helpful for larger or complicated businesses. (Those businesses selling products, with numerous staff, or complicated payment or ownership systems.) All those reports are overkill for self-employed businesses. We just need to ensure three key things balance:
the amount you're paid
the amount you work
the amount you charge
These three things are your trifecta. And here's how they go wrong:
Planning the business so that the amount you're paid is just "what's left over." You're going to be broke, or overworked, or both.
Planning to work as hard as is necessary to be successful. This doesn't guarantee your success, but it does guarantee your eventual burnout.
If you believe the amount you're paid is the same as the amount you charge, then you're not grounded in reality. Self-employed businesses often have very low overhead and very low start-up costs. And our expenses are not zero.
If you make these mistakes, you're going to always feel like you're trying to keep your head above water. (Keeping this swimming metaphor going...) you can feel like you don't even have to tread water if we plan in a profit margin. Like I said before, we're not in this for the profit, but we are taking a risk. In our economy, a risk that works out comes with a financial reward.
The goal for our trifecta is balance, plus some room to breathe (aka profit).
I'm going to spell out the arithmetic behind this in this article. But let's get real, these kinds of calculations are easier in a spreadsheet! Join the Launch Pad to gain access to my custom-built Trifecta worksheet. (Along with tons of other business launch resources!)
Constant Expenses
Before we can find that balance, we need to take into account your expenses. Specifically, we're talking about ongoing or repeated expenses. This is stuff like: website fees, business license renewals, liability insurance, business cards, and software subscriptions, just to name a few. Tally these up to get your average monthly expenses.
We also want to take into account that not all your time will be "billable" or client-facing. You've got to do administrative things like bookkeeping or renewing business licenses. You'll also be doing work to generate and nurture prospective clients. Conventional wisdom says that self-employed business owners spend 20% of their time on non-billable work.
And then there's taxes. Unlike when employed, your taxes aren't withheld from every paycheck. You also have to pay the employer portion of your payroll taxes. (Sometimes referred to as self-employment tax.) The advice I find that works is to set aside 20% of all the money you bring in.
Trifecta Calculation
Once we've accounted for all those relative constants, we're ready to find that trifecta balance point. I find it's easiest to start with some ideal values for what you charge, what you're paid, and how much you work.
We're looking for what you expect to charge clients on a per-hour basis (or price per hour.)
Figure out what you want to get paid after tax and on a monthly basis. This is your desired monthly pay.
The amount you want to work in a given week should include all admin time, travel time, and client-facing time. This is your total hours goal.
Take your total hours goal and multiply by .8 to get your billable hours goal. Take that number and multiply it by your price per hour, and multiply it again by 3.4. (This accounts for taxes and makes it a monthly total instead of weekly.) The result is your monthly gross revenue goal. Deduct from that your average monthly expenses and your desired monthly pay. This final number is your breathing room.
I call it breathing room, but you could also call it surplus or profit. If it's a negative number, then when you're at your ideal workload, you'll be that much short of your ideal salary goal. If it's positive, then that's how much profit your business will bring in when it's at those ideal numbers. Congratulations, your business is, by definition, profitable!
If your eyes have glazed over, remember that I've built a streamlined tool for this in The Launch Pad. A guided spreadsheet means you can focus on what the numbers mean instead of the math behind them.
What Does it All Mean?
I recommend your profit be 6%-20% of your gross revenue. If your profit is less than that, or a negative number, make adjustments to the ideal values you started with. Here's guidance on changes you could make and their impact:
Reducing your desired monthly pay is the easiest way to increase your profit. But it's also the least effective. The profit and salary both go to you. Reducing your salary directly increases your breathing room. But it doesn't actually improve the reason we want breathing room. If you choose to reduce your pay, be sure to keep it at a "comfortable" to "more than comfortable" salary amount.
Increasing your price per hour will give you the most bang for your buck. This is where I recommend starting your adjustments to your ideal numbers.
Increasing your total hours goal will also shift things. I find that adjusting your total hours goal makes less impact than price.
You could try cutting monthly expenses, though self-employment already has such low overhead. It doesn't make a significant impact most of the time.
If you feel you have too much profit, consider lowering your hours or finding ways to give back. This is a great opportunity to explore offering your service on a sliding scale. Or you could try donating your expertise to a non-profit. (FYI, you don't get a tax benefit for donating your time/services. If you want a tax benefit, bring in the excess profit and then donate it to a non-profit.)
Increasing Your Price
I've advocated that a strong place to start righting an imbalance is to increase your ideal price. But your price isn't dictated by costs alone. There are also market forces. In the Launch Pad, I provide guidance on Market Price Research. This is a process that helps you understand the norms of your market. The norms are only part of your market. How you spin what you're doing and the position within the market are also factors. These tie into your understanding of your ideal client. If you haven't looked into these, do some learning and then circle back to the trifecta. If you're undervaluing your service, that's gotta stop.
Increasing your price can also be uncomfortable because it connects to our self-worth. It can feel boastful or proud to claim a large number, even when we know we're worth it. It can also be scary to tell someone your value and have them disagree. (Even though this isn't actually what's happening. If someone doesn't accept your price, it means they're not your ideal client. You're still worth what you're worth.) Your value as a person is immense and immeasurable. Your self-worth is not actually up for negotiation. Sussing out what's market forces and what's internal forces can be tricky. This is part of what I can help with as a coach.
Now What?
If you've found that balance point, then, guess what? Your business has a financially solid plan! You now have a price, salary, and workload that will meet your goals. From this solid financial foundation, business success is a real possibility. In order to bring success to fruition, we'll need to rely on the stuff covered in all the other parts of a business plan. Join me again next month when we'll get into a business's operation plan.
