“Know your numbers’ is a fundamental precept of a business ~ Bill gates”
You have the idea. You have the passion. A solid technical know-how of how to make your product.
You know you are just inches away from disrupting the market with your idea.
You know the requirements for starting a small business.
Time to take the plunge?
Wait! How well do you know your numbers? (Please do not call me a party spoiler. I know I asked a question before you could just hit “launch” button on your screen)
Since I have already stopped your startup from getting launched, how about we dwell a little more on the importance of making sense of “the numbers” in the business you intend to start.
Does your small business have a plan?
Do you know how to write/make business plans for a small business or start up?
Let me stastartupa few simple questions.
Do you know how much money you have with you to survive without any income?
How much are you willing to spend on marketing?
What is your break-even number?
How many sales in numbers do you need to reach profit?
In short, how well versed are you with your business numbers?
Do you know most of the entrepreneur struggle day and night to chart simple business plans for their small business or startup (forget the complex business plan)?
I meet a lot of startup/small business owners who want a sample small business plan for their business.
Trust me, after I share the sample sheet i have used for years for them to fill. They take months to come up with something concrete.
Suddenly, the list they had earlier used as a checklist to start their business becomes incomplete – missing the most important part of starting a business.
The importance of financial planning for small business depends on how well versed you are with your business numbers.
I recently met a business owner who calculated the profit she earned from her new business without taking into consideration her Travelling and Daily Allowance.
It was déjà vu for me.
My first years in business was spent performing worse financial stupidities than hers.
Why numbers are important:
Let’s say you are a startup owner who recently received a 5 million funding to get the most business in the least amount of time.
I know the hypothetical scenario sounds too good to be true but let’s just assume, you are one lucky startup owner who has hit a jackpot.
You look at a few simple yet powerful mediums of promotion and decide to bet your money on them.
At the end of the day, if the money you spent does not get you the results desired. The money has gone down the drain.
Be ready to get spanked by your investors.
Something which has happened with a lot of Indian startups in last one year.
Believe me, you are not alone when you buy the full-page ad in a newspaper hoping to get a lot of customers.
The problem is we do not put a number to the “lot of customers” i.e, how much sales do we expect to make with the ad? Something which a simple financial module of a business plan could have easily helped us achieve.
The above examples are related to advertisement and promotion.
Don’t look at with me with “I am a cynic” face.
I am just getting you to face to face with how the well-funded startups were before the ugly world of “heavy funding, unrealistic expectations sunk them”.
How about looking at other examples of reaching break even or a point where you start picking a salary for yourself.
Salary? Me? Am I not working to make profits?
Well. That was the bewildered look my friend gave me when I told him we take salaries every month.
He kind of had aversion to the word “salary”. The job industry was not very nice to him…I guess 🙂
The game takes a serious turn when you must sit down and plan the future of your business.
The staple diet of your startup, which obviously includes cash as the chief nutrient is now to be planned from day one.
The lean startups need the right diet at the right time.
Forget the planning and your startup will fail sooner than your first sales.
How to plan your numbers or how to make a business plan for small business:
Look at everything which is connected to numbers. In short, look at your whole company from the perspective of numbers. Now that’s no easy task. But it’s not even very complicated for small business. They are still without the flab which comes with the large business.
The numbers are small and can be easily made realistic.
Un-complicating what I wrote above.
Even if you are the biggest geek in the world, your product will bite the dust if you do not know your numbers.
Technology is cool but numbers are cooler. Especially, when you understand how they can swell your bank balance.
Get over your fear of spreadsheets and start building a simple business plan with more emphasis on numbers. They are the ones guiding your business on the right path.
Here is how you can create a simple business plan (i will place more importance to the financial aspect. I have never been too good with theory).
Create two spreadsheets – accounting ledger and financial plan.
The accounting ledger you will update every time you do an expense or get a payment (till you hire an accountant).
The Financial plan is the spreadsheet, where you segregate all your accounting month wise. i.e, you put in the estimated cost – income for every month for the next 6 months.
I have used a simple spreadsheet for the last 3 years to project the finances of my business.
The use of financial planning (a simple way of saying i know my numbers) is demonstrated in the sample business plan ‘s financial sheet I did for a startup sometime back (Download the Sample Financial Plan).
The financial plan example/template above is for an online portal “IEMS”, we were to launch in a middle east country.
The portal had specific features for our paying customers business centres, who would buy our service on the portal as a paid member and a very affordable structure for students who would use our service as an end-user.
As you will notice, the plan is very simple.
I have divided the financial plan of each year in two parts cost and income, where Expense/cost lists all the expenses you would make every month (from the day you start working on the product).
The biggest advantage of dividing everything month wise is the projections i get for the next few months of my business. It helps me envision the money I need every month to keep the ship afloat.
When the business starts, i can easily manipulate the numbers to see the impact it has on the final output envisioned.
The month wise division also keeps me on my toes with the expenses i have coming on my head every single month.
One important point while looking at the spreadsheet is that it does not follow the rules of accounting. I will be upfront with you. I am not an accounts guy. I look at numbers as black and white.
I will be upfront with you. I am not an accounts guy. I look at numbers as black and white.
No complexity involved. Let’s leave the complexity to experts. You and I are all-rounders who have to know all tricks of the trade. We should know our numbers to the extent of them making sense to our business.
Rest. Leave it to the accountants, CA, advocates, etc.
So the cost of fixed assets, which accounting guys put in their accounting heads as some “head and subhead” is just a “cost” for me. i.e, I need to have the money in pocket to make the expense, when the need arises.
Now whether the cost leads to an asset or a marketing expenditure is another story which accounting teams are well equipped to handle.
My business plan’s financial plan is simple and easy for me to use.
The revenue section at the bottom of sheet details the money we expect to generate each month by selling our subscriptions. The cost per subscription * number of subscriptions = net amount shows the money I can expect from the business.
As you will notice, I have divided the income into two different revenue streams. My business had two kinds of subscribers. Hence, the two revenue streams to segregate the type of user and obviously the pricing model for them.
(Note: Always take worst case scenarios. i.e, always keep extra buffer amount as the expense and keep the least amount of revenue generated for each month. Do not inflate numbers. You will only hoodwink yourself from seeing the reality by putting big numbers. )
I still have not put churn rate for monthly subscribers. In future, i will show another complex example with how to use churn rate for SAAS business plans.
The best part about the financial planning spreadsheet i use is, it’s my spreadsheet and I know how my business works.
The heavy lifting of accounting, I leave it to my accountant.
For lightweight lifting and business projections, I rely on my spreadsheet to project my next 6 months of expenses and I use one more spreadsheets called as the estimated business with billing amount to get a final net balance value for next 6 months (months wise).
The type of spreadsheet I have included above has been my lifeline for years.
I know the spreadsheet for the financial plan is not perfect but it does the job.
If you need something complex or something which can help you make a business plan for a small business to present to your investors, I highly recommend using a tool called Live Plans.
My first business plan was built using their service.
Till date, they stay my favourite. Every time I have a consulting job to make a business plan or we plan to start something new. I turn to Live Plans to use their service.
The advantages of using the service of Live Plan are:
- Easy to use
- Help you understand your business better. It’s anytime better than hiring a consultant who will cost you a fortune and will take ages to understand what you want
- Their sample business plans are excellent.
- The suggestions they have for you while making the business plan are all worth the money
The Live Plans tool offers 50% off on your first month of subscription around USD 10/month and then it costs USD 20/month (approx).
If you only use their service for making a business plan, it should not take you more than 2-3 months. i.e, You can easily finish a business plan in a budget of USD 50.
In case you want to stick to a simple plan to just help you run your business. You can anytime turn to the sample business plan shared by me.
We all need to be good with our numbers. Tomorrow when you meet an investor, the monthly expense, sales, profits, projections should all be at your fingertips.
Knowing my business’s number properly had helped me manage and plan my small business efficiently.
I have covered a great deal of information about the importance of numbers in your business in this article.
I hope the article helps you understand your business’s numbers?