Last week we got to a first Financial Plan. Many times when Entrepreneurs do this they don't end up with numbers that they like. This is one of the reasons that I recommend strongly that this work be done in a Spreadsheet. Spreadsheets done properly (with formulas where you can), make it easy to update Financial Statements. This means you can experiment with changes by entering only a few new numbers.
If you followed my advice, you will have a 2 year plan. By the end of that plan, one would expect to be at or near the run rate of the business. So, take a look at that last quarter of your plan and then multiply the totals by 4. Does that quarter meet your financial needs? Take a look at the Net Margin in particular. In many small businesses, you are going to pay yourself out of that number. In others, you will have planned your pay as part of COGS or OPEX. Either way, you need to cover your needs.
So, what is a reasonable Net Margin result? That depends greatly on the type of business that you are in. At a bare minimum, you would expect 5% of Revenue to become Net Margin. If you are not going to be able to do that kind of percentage consistently, then your business is not sustainable. Any glitch or problem will send your business into a tailspin that it can not recover from. At the top end, a business like a solo professional (Lawyer, Doctor, CPA) might expect 20 - 25% Net Margin if they are not paying themselves out of the business. That way they are making a reasonable living.
In any case, there are some things that you can think about changing when the numbers don't work for you. The place that most people start is on the Revenue side. You can look at attracting more customers, having higher prices, or selling things more often. In the end, it probably means some sort of change to your proposed business. You will have to circle back to your Ideal Client and your Universal Value Proposition and update them to match your Financial Needs.
The next place to look is on the cost side. Some of those Revenue enhancements might cost more money than you were planning like a better location or more advertising. But you also need to look at your expenses and ask if they are really important. Every expense dollar saved goes straight to the bottom line. Every Revenue dollar does not. Revenue gets filtered down through COGS and OPEX. So serious attention needs to be paid to Cost. This is not the energy or attractive part of the business, but it is important.
To summarize, the basic points are as follows:
- Be ready to update and modify that first plan
- Understand your needs and create a plan that meets them
- Every change in your Financial Plan probably updates the rest of your Business Plan
- Cost is as important as Revenue
Okay, now that we have a Financial Plan or what might be called an Operating Model we have to circle back to how this will be Financed.
Have a Great Day!
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