budgetting
How much time can you sell?
This post is aimed at those businesses who essentially sell their time (and the time of others) and looks at what assumptions you can make about how much time you can realistically sell per annum.
Q1 – What would you like to earn per annum?
Let’s start with the simple version i.e. a freelancer or sole trader. The more precise question is what taxable income would you like to earn? The answer to this question is different from ‘what turnover are you aiming for?’
To demonstrate:
If you’d like to have a taxable income of say £50,000. This is after the costs of running the business have been taken into account. And these business costs come to £25,000 (travel, rent etc). Then, in order for your taxable income to be £50k you need to turnover £75k.
Q2 – How many chargeable days are there in the year?
The answer to this question is crucial as it will determine the daily rate you aim to charge. If you’re already in business then look back at a few months and see how many full days in each week are chargeable times … see if you can get to an average.
We reckon that the conservative answer is 2 days per week. We’d rather be conservative than optimistic on this figure because if you go for the optimistic end of the spectrum e.g. 4-5 days/week but never achieve it then you’ll find yourself needing to sell a lot of days of time just to achieve a basic level of income … a headless chicken comes to mind.
So, on two days a week that’s roughly 100 days per year.
Q3 – so what daily rate am I aiming to charge?
Well, divide your goal income (£75k) by the number of chargeable days (100) … to get £750/day.
Another way of looking at the daily rate you charge now e.g. £250 is to say how many days do I need to charge in order to achieve my goal of a taxable income of £50k … in this case 300 days … nearly 6 days per week … not likely!
You could also consider what your turnover will be if you sell 100 days at this lower rate – £25k. Once you’ve taken the cost of running the business into consideration there won’t be much left to pay you with.
Can you now see why there is little virtue in being cheap and a definite need to manage how much free or cheap time you give away? (and by the way there will probably always be a need to give away some time as you invest in new working relationships or do early work on new unpaid ideas/projects/products).
In the next post on this topic we’ll look at how you compare this rate to the market rate (i.e. what customers expect to pay), and how over time you can raise your rates as you get busier.
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How to create a budget (plus a free tool)
Do you know how much money you make? Or is it a case of “I don’t know – it depends on how the business is doing”.
Whether you are starting a business or growing, you need to know what you are trying to achieve within the business and qualify how you are going to reach your goals, then you can set a budget to help you reach your goals.
Setting goals that affect your bottom line or personal finances are often more motivational than setting a sales target.
This is not a glamorous job but necessary for your business – to control costs, identify problems and ultimately achieve profitability. Creating a budget should have an effect on your business … in particular it should enable you to:
- Set challenging but achievable goals for the turnover of the company and the payments to you the business owner(s) and the staff you employ … you want to be clear on how success in the business becomes success in the team’s bank accounts
- Plan for investment of profits into the ongoing growth of the company … be it investment in R&D, intellectual property, more staff, different skills, board members/advisors etc
- Plan for tough times … knowing in advance where you would make cuts if revenues drop and what the markers are for needing to implement these tactics helps make it easier to do this if the situation arises
- Manage the day to day costs … all the things that are almost invisible except when they are all added up … phone bills for those with international clients, travel in general, last minute couriers. These items can tell you quite a lot about bad business habits and offer the chance to cut costs without reducing the value delivered to clients
- Manage the cash flow challenges that come with projects, temporary staff or product manufacturing … if you have prior warning of when the cash flow hole between needing to pay others and getting paid is likely to occur, then you can negotiate an overdraft or manage the chunks in which you pay/are paid
- This is not an exhaustive list but will probably give you enough to be thinking about (i.e. if you’re not convinced by these reasons we don’t think you’ll do a budget whatever else we may say).
A budget is not written in stone – it is critical to be flexible and adapt to circumstances, have a plan B budget just in case. Indeed for those who come to enjoy excel spreadsheets (honest, some do) then we’d recommend doing an ‘optimistic’ and a ‘pessimistic’ version of both income and expenditure for the year. For those who are less keen you’ll find a ‘what if’ calculator in MyCake which allows you to use sliders and dials to set these assumptions, ne’er a spreadsheet in sight (though we think you should write a few things down as you do this otherwise you’ll forget).
I have laid out a few simple tasks to help you get control of your finances and make the numbers valuable. You will also find a free tool to download at the end of the post to assist you.
TASK 1 – analyse the information you have to hand
- Evaluate every penny going in and out of your business so you fully understand what is going on
- Make sure costs are classified in correct budget lines so you have all the data in the right place
- Look back through the last TWO years and pay special attention to fluctuations. What is your biggest sales month? When are the low periods? When do you hit an expense high? Where do you blow your money? What percentage increase have you seen in specific supplies, overheads and in your sales? If you are a MyCake user, not only can you run a bunch of reports on your own business , but the benchmarks will show you where you sit versus the best and worst in your sector.
TASK 2 – do a first pass at a budget
- Create a base line budget as a guide to work from – start by separating your fixed and variable expenses
- Fixed items include rent, debt interest, insurance and other expenses that cannot be avoided and are predictable
- Typical variable items are salaries, materials, transport, and marketing. Don’t forget the associated costs – for example salaries should also include cost of hiring new people, benefits, NICs etc.
- Do use last year’s books as the start point for creating the budget for the coming year. You can vary it to account for changes you plan this year as a next step.
TASK 3 – take a look at the top line
- Your customers are the best source of information about sales projections – are your customers cutting back or growing? What are they predicting for the year ahead?
- Examining your sales can be by customer or by product depending on how you operate
- Remember that past sales, based on the booming economy or credit crunch, may not give the best prediction for the year ahead
- Build a buffer into your budget to allow for fluctuating prices in materials or loss of a big customer
- Estimate conservatively and create an average price you can apply through the year – eg basic monthly spend on travel or phone
TASK 4 – reconcile your costs and expenses
- Look for relationships between specific expenses such as marketing and your top line so you know where you can save at short notice.
- This also helps to plan a three month cash reserve to cover droughts in cash flow.
Having a budget allows you to be flexible. You can see what the actual numbers are and if you are achieving your goals – it allows you to be able to make changes if you are missing or exceeding your goals. Monitor the budget at least once a month, make mini revisions and change your spending quarterly to make sure you’re on target to reach the goals.
Alternatively have a best case, worse case and happy medium budget so you can fall back or move up as necessary.
At the end of the day you may want to be able to compare your expenses to other businesses, via a professional association, to see how your spending compares to benchmarks in the industry. The more you can do to construct ‘norms’ for your company the easier it will be to compare these to the best in your sector.
MyCake has created an empty budget spreadsheet for you to use for your own business budget – click to download it: sales & cashflow. Feel free to email us if you have questions and please note that we accept no liability for the way in which you use this spreadsheet. I mean, we think it’s sensible, we’ve checked that the inbuilt calculations look right to, but no absolute promises!
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Starting the year by putting your business in good shape
No gym required (though this post might provide food for thought as you pound that treadmill) instead some wise words from the mandarins (sorry still on the Christmas puns).
How can you keep your profit high in a tough market whilst improving customer service and managing your cost base? Well there’s a sentence full of business jargon, lets illustrate that in terms that make more sense for a small business….
The tendency in a tough climate is for new projects from clients to get delayed whilst you still have to keep spending the same amount of money on staff and overheads. That’s not great for cashflow or profit but there are a number of things you can do to help the company through it:
- review the processes by which you manage the business
- review your client base and the things they buy from you … what trends can you see over a 2-3 year period? has there been a radical shift in the recessionary climate (ie what was true in terms of customer behaviour in boom years may well not be true in lean times)
- have a look at the market and your pipeline and work out whether you need to set up new products & services and perhaps stop some of the old ones … or even consider a more radical reinvention of the business
- learn from sectors who’ve adopted what are called ‘lean manufacturing principles’ … kinda like ‘just in time’ production (works for services as well as product based businesses).
Why think about this now?
Well quite apart from it being a good idea to review the business annually, ideally in one of your quieter patches in the year it’s also a sensible idea to set some goals for the year ahead and review the mechanisms by which you’ll achieve them. In a tough climate the rules may well be different so you shouldn’t assume that the things that used to work for the past few years will still hold true. For example do you?
- meet regularly as a team e.g. weekly teleconferences or meetings either for the company as a whole or by team or project … in these meetings you should be reporting on progress of main business activities, any delays or overachievements vs. forecast & deadlines
- track the orders you receive, projects you pitch for (and who wins them if you don’t) and the accuracy with which you meet delivery deadlines and customer satisfaction?
- have mechanisms for maintaining quality of output?
- manage expenditures against a budget (or do you just spend money as projects or areas of the business demand it) ie are you proactive or reactive when it comes to managing costs?
- have a mechanism for charging project costs to your client as appropriate?
- have a process for reviewing outstanding invoices and chasing for payment as required
Looking at the way you do things:
- look at which of your products and services sell best and look for common factors in these – are they new products or well respected older ones. What do customers value – quality, speed, price etc? Now look at the cost of these key products and work out the profitability of each one … there’s no point selling large quantities of things that take lots of energy but don’t make enough profit, that’s just running to stand still
- mapping out the way you make products & services and the other processes you employ for running your business is one way to visualise the way you do things. It also helps you spot ways to do things more efficiently … there may be processes you can combine or key components that you could use in more products or services
- once you’ve looked internally look externally … who are the leaders in your sector and how do they do things? What can you learn from them?
Review can lead to reinvention … this is a good thing … don’t get sentimental about the way you do things but do retain the things that make you unique (and that customers value!).
That said you don’t want to squeeze all the ideosyncrasies out of your company … you’ll reduce the chances of serendipity leading you into new places. Our favourite antidote to excess efficiency is The Salaried Masses – it’ll remind you why you like being an entrepreneur rather than an employee and with luck will stop you boring your workforce!
Finally, one more thing. Don’t cut your marketing budget … it’s often one of the first victims of cost cutting exercises but it only works in the short term. If you’re not marketing your goods you’ll struggle to acquire new clients or even to remind existing clients of why they prefer you to the competition. Those who invest in marketing in a tough climate tend to emerge ahead of those who don’t when the market picks up … there are lots of studies that prove this!
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So, you’re planning to take a product (or two, or more) to market … well here’s a few things to think about
As with services this starts with identifying your turnover goal for the next 12 months. However, unlike selling time you have a bunch of production costs which you need to take account of before anything else. As a very general rule of thumb the direct costs of production when added together should not exceed 50% of the wholesale selling price. If you sell retail as well as wholesale again a general rule is that the retail price is roughly double the wholesale price (in reality this depends on what sector you are in so in fashion the mark up is often 3-4 times wholesale price, in fine art it is usually only double).
Consider what percentage of your turnover will come from wholesale vs. the percentage from retail sales?
So, lets assume you want to turnover £100,000 in twelve months and that half of this comes from wholesale (that’s £25,000 in materials) and half from retail (that’s £12,500 on materials). The reason that I put this in figures is that it is important to see that there are significant costs involved in reaching your sales goal (and we haven’t even started talking about marketing and all the indirect costs).
You need to take account of your ability to invest in the materials before you make sales … if you provide too many sale or return orders you will find yourself paying for lots of materials and it could be months before the goods sell and you are paid. It is too risky and the shop has little incentive to sell your work as you are essentially lending them the money to stay in business.
Equally you need to be clear about the difference between small batch production and its high cost and large scale manufacture. Is it your goal to mass produce or do you want to make more exclusive products than that? There is no right answer here but if you are a small firm and you want to make use of the economies of scale which are achieved with mass production will you do this alone (with all the marketing cost associated with launching a product nationally or internationally which will be needed to sell the volume) or would you licence the product to a larger firm who has the money and the distribution to take it to market.
“This is a whole bunch of difficult questions and all I really want to do is get my work out there.”
Sure, I appreciate that but if you don’t consider this stuff at the beginning the worst case scenario is that you produce a small batch, under price it, forget the costs of marketing it either to shops or to end clients, provide product on sale or return because it’s better than holding stock in your studio and end up struggling to recoup what you spent on it let alone make a profit.
We just want to make sure you’ve considered the things above before setting a price and committed to a production mechanism. Your price must be high enough not only to cover all your production and marketing costs but also to leave enough profit to pay you and have some left over to go into the development costs of the business (investing in more stock, better equipment, larger studio etc).
Growth doesn’t tend to be a smooth curve, instead it looks more like a staircase where each of the verticals means that you’re spending money before you recoup it in sales. That means having enough spare cash (and/or a good relationship with a bank to lend you the money) to make the investments when you need to.
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Pricing your Services (part 1)
The good news is that this starts out pretty simple as you are essentially selling time. If you are a freelancer or sole consultant easier still because you are selling your time!.
Pricing your time: start out by answering two questions:
1. How much would you like to earn in a year?
2. How many billable days do you think there are in a year?
Lets take an example, lets assume you want to earn £50,000 and that there are 100 billable days in the year. Divide £50k/100 = £500/day.
NB don’t overestimate how many billable days there are in the year otherwise you’ll underprice yourself and end up running around like a lunatic. After all if you can sell 100 days at a good daily rate you can spend more time on the beach and enjoying the results of your hard work. It rarely pays to be too cheap … you may not be considered credible if you are.
100 billable days equates to about 2 days a week which leaves you 3 days to pitch for work, have introductory meetings and do admin.
Lets consider a few other things:
1. What level of expenses will be involved in winning business?
2. What percentage of jobs that you pitch for will you win?
3. How much time will you have to give away before you win business?
4. How much time will you have to spend managing contracts and other people?
You will therefore have to add in both time and costs afterall if you turnover £50k this will not all end up as income to you! You may of course be charging expenses to clients as an additional rather than within the cost of your services … this is up to you and may well depend on whether clients are buying a ‘package’ of pre-defined services (in which case you should probably take account of all expenses in the price of the package) or whether you are selling consultancy.
Conclusion: If you want £50k as your taxable income then your turnover will be more like £60-75k.
“That’s all very well but how does the rate I want to charge compare to market rates for my sorts of services?”
Fair point, well made. Here are a couple of things to think about.
- If you are billing time (ie consultancy or freelance) then you will probably end up with a range. So your preferred rate may be £500 a day for your most innovative & demanding work but you might take on work at lesser rates if it gives you stability, regular income or is in some way ‘standardised’ rather than bespoke. So when you start your range might be between £150 – £500/day. The trick is not to take too much work at the lower end of your range when you are busy but not to burn your bridges at the bottom end so that you can take it when times are quiet and you need the income. Equally you want to move your range upwards over the years so that five years in it’s shifted from £150-500 to £300-700 for example.
- If you sell pre-defined services or packages of services then you do need to know how your prices compare to competitors afterall we all know what happens when we notice that we’re paying above the odds for a phone contract … we shift to another supplier unless we are very clear about the added value that our current supplier offers.
- Why would you package up your services? Well customers will be clearer about what they get for the price and there’s less risk of you over-delivering against your commitments. It is often easier to buy a defined package than a more nebulous and open ended bespoke service. Plus it means that once you’ve defined the service you can offer it time and again without having to re-invent the wheel … this has the benefit of being more efficient. It depends in part on what the market is used to buying and in part how you want to operate.
- Is there a difference between your newest, most innovative & exciting work and your standard stuff? The latter is absolutely the stuff you’ll package up, the former is your bespoke stuff.
So, now that you’ve worked out what you’d like to earn in a year and started thinking about bespoke vs. standard services and how the prices in your range will differ next you should think about what constitutes a small, medium or large project/job/contract.
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What is a Small, Medium or Large customer or project for you?
What would constitute a small, medium or large order of your products? For example if you are a product designer with 8-10 items in your range:
- what would make up a typical small first order from a new shop? Should there be a minimum order below which it is not really worth your while?
- If the client wants to take products on a sale or return basis (often true for design & craft shops) what is the largest order you would accept on this basis? Beyond what point would you insist that they bought some in order to share the risk of a large SoR order with you.
- What would be a larger repeat order from a steady client?
- At what point do order sizes make you think about producing in larger batches? What is the minimum order of a new product (from one or more clients) that you need in order to justify the risk of putting it into production?
The goal in starting to answer these questions is to build up a picture of how you will achieve your sales goals. If your turnover goal is say £100,000 in a year then the question is how many large, medium & small orders will it take to reach this? How about 5 orders of £10,000 each, 13 orders of £3,000 and 22 orders of £500? What would be a likely mix of products in a £10,000 order? How would this be different in a £3,000 order? What would it take for a client to move up a level in their ordering patterns?
Of all your existing and potential clients who might make these orders? Start putting clients into groups according to ordering habits and potential. What you are doing here is setting sales targets for individual clients and your next task is to work out what it would take for these clients to increase their ordering levels with you … do you need to spend more time with them looking at how your range meets their needs, are there any gaps in your range that need filling before clients increase their orders? What would help or hinder this growth? Make a long list, prioritise changes & improvements according to which would make the greatest difference in your sales levels and sense check this against what these changes would cost and your ability to make this investment in the business.
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Just because an invoice is now paid doesn’t mean you’re free to spend the income!
When a client pays an invoice you don’t get to spend it all. It’s not all your money! The question is how much do you need to put aside to cover your tax bill, your costs of pitching for and delivering business and your ongoing admin/office costs?
As a really rough rule of thumb we suggest splitting it into three pots of cash (indeed it may make sense to have two accounts in addition to a current account to hold these monies). One pot is for the tax man … every time a bill is paid transfer a percentage into this account. This prevents you spending it now and not having it when you need to pay the tax man. One pot is for expenses that the business incurs … and the remainder is for you. If you are VAT registered you could do worse than having a separate pot just to hold the VAT.
How much to allocate to these pots? Well, how would it be to split every £1,000 you bill into thirds? This would give you a bit spare in your tax pot and you probably would have some spare in your expenses pot to. This excess could be reinvested into the business as marketing spend and a rainy day fund to cover the time when you need a new laptop urgently.
Pricing services delivered by others but billed by you
As the demand for your services increases you will need to bring in others to undertake some or all of the delivery. In larger projects you’ll need to consider this at the start when you are costing the project for the client. There are several approaches to this … for example you can:
- Employ people and pay them a fixed wage
- Subcontract the work for a pre-agree daily rate
- Pass on the work to another and let them bill the client direct
You’ll need to consider a few things such as:
- Who will be liable to the client for the work – you or the person you subcontract to?
- Is this an area you will continue to do work in or a client you continue to want to work with? (in which case don’t pass on the work and do continue to be the one sending invoices to the client)
- What does your professional indemnity insurance cover and do you need to extend it?
- How will you agree the rate you pay to a subcontractor?
The last one of these points needs a bit more explanation of the options.
You could just pay the subcontractor the rate you would pay yourself. However this doesn’t take account of the fact that you’re the one pitching for and winning the business so you should at least take a percentage.
Alternatively you could have a discussion with the subcontractor as to what rate they’d like to be paid. If it is less than you’d charge if it were doing the work you make a profit on the difference between the two rates which is legitimate as you are still responsible to the client for the delivery of the work on time, on budget and to the same quality as you would provide. Being paid for work you don’t deliver is a good way to grow your income!
If the subcontractor is more expensive than budgetted either you have the wrong subcontractor or you need to work their prices straight in to the budget and add a percentage on for the project management.
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Do I, don’t I, do I need an office?
How do you work out whether you need an office or studio space? It’s a significant part of your cost base if you do so it’s worth looking at the pros & cons. If you don’t what are the reasonable substitutes? If you do how do you choose?
Questions to ask yourself:
- Do I mostly go to visit my clients or do they come to me?
- Would this change if I had suitable space to invite them to?
- Would it make me more efficient if clients came to me? (and would they be happy to come over?)
- What would it add to the client to meet at my site (seeing other work, use of tools that I can only have in one location etc)
- Might it lead to more/new work if they could see more of what I do or the way I work?
- Could I ask staff or freelancers to work on my site and would the team work better if we did this?
- If I’m growing will I be employing (more) staff and therefore need a place for them to work?
- Where would it make most sense to locate myself – near my suppliers, my staff base or my clients?
- What type of space do I need, where does this space exist and what does it cost?
- What is the minimum lease period (managed office space can be as little as a month, vast warehouses might be 20 years)
- How long might I stay there (ie how fast are you growing)
- Will I want to put all the parts of the business in one place or do I want to separate production from sales? ie shop frontage is expensive but warehouses are cheap
If you need a bit of help weighing up the pros & cons here are a few additional thoughts…
- wherever you are it needs to be a place that looks professional to your clients (whatever that means for your sector)
- the space you choose to show clients does say things about the scale of your operations, your professionalism etc so do gie it some thought
- that said very few people are only based in one place these days so meetings in smart hotel lobbies, members clubs, cultural institutions etc are perfectly professional … just make sure you know that the place will be quiet enough (and private enough) for the work you need to do
- if you don’t have space now or if you reckon you’ll be expanding into more/more expensive space soon then plan the additional costs into your budgets & pricing ASAP … if you’re making more profit for a while then great and lets face it no move comes without cost so it will no doubt be fed back into the business to cover move & fit out
Pros of having an office/studio etc:
- it’s your space and you can decorate it to reflect your business
- it’s a place for a team to work and does operate differently to getting a bunch of freelancers together intermittently
- it makes for a steady working environment and this often improves productivity of you and your team
- your clients will learn all sorts of unexpected things about you when they visit and this can lead to new business and/or a change in their perceptions of what you do
- it gives you one place to store previous work, files, all your computers, back ups etc … making it easier to access than if you have to pack it all away out of reach
Cons:
- it’s a committed expense
- you may be committing yourself for a period longer than your pipeline of new work which may feel uncomfortable (you’ll feel more comfortable if you have a proper budget and sales plan to bring in new work!)
- the minimum amount of space you can lease may be bigger than your requirements initially (actually it’s often true that you move into places that are bigger than you need because you’re planning on expanding the business and need not to move more than every 3-5 years)
- there may be a bunch of costs you’ve not thought of until they happen to you (rates as well as rent, business versions of phones, gas etc which are sometimes more expensive than the domestic versions, more insurance) … if you’d like a run down of what these are drop us a line at info@mycake.org and we’ll tell you what we know
So, in summary … if you’re growing a business you need to think about the space that you need not just now but in the coming 12-24 months. If that business needs more people you definitely need to think about this not just because they need a desk or studio to work at/in but because you want to think about the working environment you create for the business. There are plenty of solutions that don’t require you to take on leases. In London MyCake is a fan of The Hub and BASH Studios not least ‘cos we like the people … important to like the people who are around you we reckon.
If you are essentially a one person business and your growth will come through working with other associates then you may not need a permanent office/studio space but you might want to consider how & where the team meets and where you meet clients (ie which members clubs you need to join). When MyCake’s in town we use the Institute of Directors quite a bit because although it’s a fairly dry business space and not as cool as plenty of members clubs it has premises all over the UK, good additional services to members and you can hire meeting rooms as and when needed. MyCake also uses the ICA bar, RORC, Royal Festival Hall and the bar & restaurants of places like the Great Eastern Hotel (top tip – the Knights Bar at Simpsons on the Strand is almost always quiet).
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Building a budget for the next 12 months of sales
There are times when you look at where your income has come from in the last year and you wonder how you could ever have predicted it. Here’s a simple way to start developing a forecast.
Q1 – what would a small, medium or large invoice be for you? … put a figure to each of these
Q2 – looking at the last 12 months what mixture of S,M,L invoices or projects did you bill for?
Q3 – is this a good mixture for you? are there too many small bills? is too high a percentage of your income in a few large invoices/projects
Q4 – what would be a better mix (hint – the emphasis in the M with a few S development projects and a few L larger things)
Q5 – what would be a good goal for the next 12 months in terms of turnover?
Q6 – how would you like to split up this turnover goal into S,M,L
You should now have a turnover figure … lets say £200,00o for the sake of example … and a mix of projects … lets say 5S, 15M, 3L. Now sit down and think about which of your current clients you could target for each of these S,M & L. Once you’ve done that you then need to think about where new clients might come from to fill the gap between the predictable opportunities and the turnover goal. The answer to this question will help you plan your marketing activities … the trade fairs, conferences, magazines you need to target.
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