planning
how do I ring fence monies for research and development?
Having decided to invest research and development to build your creative business, how to you ensure monies set aside for R&D are used correctly?
Well the main thing is that you need to make sure that you actually spend the time and money you allocate. It is all too easy to prioritise paying clients ahead of your own development. In the short term this is not too surprising but it is the long term sustainability that we’re really interested in. Here are some tricks you can employ to develop a better balance between short and long term business gain:
- Treat R&D projects as if they were client contracts ~ so set deadlines, allocate staff (good working time not evenings and weekends) and report on them in team meetings and/or to your mentor or business coach
- Ring fence the funds in a budget and report on actual spend on R&D vs the allocated budget
- Set a target for the number of new ideas you want to generate in the first round … perhaps incentivise staff, freelancers and associates to contribute to this
- Aim for not more than three ideas to develop and pick a mix of low risk, quick and cheap to develop alongside bigger vision, more costly and long term stuff
- Perhaps involve a client as a test case and therefore make yourself accountable to them for deadlines. Make promises that you have to keep
- Make a director responsible for R&D just as someone is responsible for finance or marketing or HR
- Write it into people’s job descriptions and rewards packages
- Plan to phase out some of your older products or services and set dates by which you want this to happen. This means you’ll have to replace them with new things and will speed up the process
- Make income projections that include the new products and services. At least some of this new income will go to pay staff and overheads but perhaps it will also result in a pay rise for the directors
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Extract from the fourth MyCake Benchmark Bulletin which looks in depth at research and development ~ why it’s important for creative businesses, how to fund it and how to make best use of your R&D spend.
Download the full report here.
Advice for the Recently Redundant
This is the first in a series of posts for those who have recently left the corporate world and are considering their alternatives. We will make a number of assumptions about such folks including:
- you have 10-20 years experience
- demonstrable success in your chosen field and a clear skill set be it in sales, marketing, logistics etc
- your skill set is complemented by management experience – perhaps a national or international sales manager or country/regional manager
- this means that you’re used to budget responsibility
- you’ve negotiated a redundancy package that has bought you 1-2 years breathing space
- nevertheless you have a personal overhead base (Mrs Moneypenny’s descriptions of her children as ‘cost centre 1′ and ‘cost centre 2′ comes to mind though there are those for whom this may translate as a yacht instead!) and therefore will need to find an income stream or two … and anyway you’d be bored if you didn’t
We won’t look at the corporate choices you could make afterall that’s what you’d work with a head-hunter to review. Instead we’re going to look at how you might apply this skill-set in a number of other ways and how this translates into the development of a set of income streams. In particular we will look at:
- the corporate bod turned consultant approach to leveraging your existing skills and network into an income
- the senior manager turned non-exec board director with portfolio of SME boards to sit on
- being helicoptered in as part of investment package to an SME … the angel or VC’s board representative, with or without an executive role
- starting your own business either in the sector you’ve been working in (thus leveraging your network and your knowledge of the supply chain) or in a.n.other sector of your choice
- looking for a senior role in a small but fast growing company that needs to boost its management, sales, marketing and finance skills (these are the most common holes that need filling)
We might also touch on the way you can use money and skills as an angel investor in other businesses. We will no doubt also cover some of the misconceptions and traps that people commonly fall into.
First of all however you have the challenge of becoming a little more self-sufficient i.e. now that the IT department isn’t there to keep your laptop running there are practical issues you need to solve quickly and with least hassle so that you come across as professional in this wider world of business and entrepreneurship. So lets answer a few of the commonly asked questions:
- Yes, you do need a business card. No you don’t need to hire designers or printers nor do you need to worry about logos. There are many DIY business card tools online that will send you printed cards as the output. We are fans of MOO as the cards are good quality (cardboard not too thin), the templates are simple and if you want something either with a logo or a picture on the reverse you can just pick from images you upload to flickr.
- No, you don’t necessarily need a title. If your qualifications indicate an expertise that you will be making use of e.g. chartered surveyor then sure put ‘Chartered Surveyor’ under your name on a card. However if you’re not really sure what you’re going to do and might put your toe in the water with a few different approaches why bother to have a title at all. Just explain yourself when necessary. Indeed picking a spurious title may in fact be off-putting … for ‘Independent Consultant’ read ‘freelancer’ for example.
- Yes you need a laptop, mobile phone and (depending on where you live) car. On the whole people you’ll meet won’t actually care what make or model of hardware you’re sporting. They are not signifiers of status in the SME or entrepreneurship world. In fact we’ve come across cases where driving a Porsche will lose you business because the client interprets it as a sign that the driver is spending the fees they are being charged on this not on the products and services being delivered.
- Now that you don’t have the support of an IT department you will need to get better at looking after your kit. You might want some help on this one. The big names such as PC World will gleefully sell you service contracts by the likes of Geek Squad but, as with most other forms of insurance they make their money on the monthly contract that you promptly forget and don’t use. In the last few years a whole lot of small firms have sprung up who operate on a very local basis and provide technical support to SME’s. For example, Axos Assist work within a 25 mile radius of Thames Ditton. You may not need a service contract but just knowing who to call to fix the crash/delete/panic is very useful.
- You may need a CV but it will look different to one you’d use to win a corporate job. A CV is after all just a calling card and a summary of skills. There are things which can work just as well e.g. a report you’ve written on a sector or challenge, a piece of research you’ve done (which by the way will probably necessitate you calling a bunch of people you’d like to meet anyway to pick their brains and later report back to them the findings). The key point to think about amongst all this practical advice is WHAT DO YOU WANT TO BE KNOWN FOR? or put another way what work would you like to get paid to do and why would someone buy you rather than anyone else they meet in the street? Do you want to get paid to do, to think, to challenge people, to innovate, to invent???? Have a think on that. It is the answer to these things that needs to sing out from your CV, report or other calling card (by the way you might want to be known for several things, that’s fine, you just need several different calling cards … you are no longer defined or limited by your job title!).
- You will undoubtedly need to meet more people so work out where they hang out (both online and offline). If your network has essentially been your sector colleagues and clients and your internal colleagues then there are bound to be gaps. A paid membership of Linkedin might work as it will allow you to introduce yourself to people. For some sectors Facebook is used as a business tool. There are almost certainly networking groups in your area .. try a few out (do you really want to commit to a year of once a week 7am breakfast meetings without knowing who attends?).
- The sooner you can get to a point of feeling comfortable explaining where you’re at now and the areas you’re exploring the sooner you’ll find ways to explain to others how the skills you’ve acquired corporately translate into value in other settings. You’ll also find that many outside the corporate world have a certain amount of reverence for ‘big business’ which may come as a surprise to your inside track on the political machinations, time wasting and general mismanagement that you’ve seen along your way
- You might want to make use of something such as Tactile to keep track of the business leads you meet … you don’t necessarily have to treat this just to track ‘customer’ leads but you do need a way to view the strands of discussions you’re pursuing.
- Find 2-3 people you can talk to about the routes you’re considering. These might be people who’ve been self-employed for a while, entrepreneurs, family friends etc. They probably won’t be corporate colleagues. This simply because unless they’ve worked out side corporates they won’t have much understanding of the challenges you’re now facing. You want a few people around you who have working knowledge of your new world. People you can use as a sounding board for new ideas or simply to act as a pick me up when you’re having a tough patch.
This is a bright new world you’re entering, freed from the shackles of hierarchy and the gag of the PR team. All you have to do is work out what role you now want to play, who would value this enough to pay you to do it and where you find such people. We’ll come on to that and the business models you’ll need to consider in the next post.
What’s the difference between your ideal rate and the minimum you’ll accept?
In the last post on the subject of how you price time, we looked at what your ideal daily rate would be.
In this post we’ll look at how you might actually offer a range of rates (you might not publish this but you might negotiate it) depending on what the work is and how busy you are. We’ll also look at how you move this range upwards over a period of years.
Using the same example as before, where you want to:
- to charge £750 per day
- to sell 100 days of time in a year
- therefore to turn over £75,000
- assuming £25,000 of costs achieve a taxable income of some £50,000
In reality you may not be able to charge this top rate for every job. There are a number of reasons for this:
- the market rate for your skills and your level of experience may not be as high as this so if you charged it you’d price yourself out of the market
- you may take on work for which you are over-qualified, particularly if you’re not as busy as you’d like to be and need the income … but you may therefore not be able to charge top rate for the work
- you may choose to over-deliver. .. spending more days on a project than actually budgeted for
- you may have some clients whose budgets are simply smaller, yet they offer exciting work so you drop your rate in order for them to be able to afford you (in these cases the work had better be exciting!).
In practice you may well need to have a range of daily rates, and the rate you quote to the client depends on what the work is, what sector they are in, how much you need to the income etc.
So if £750 is at the top of your range what is at the bottom? Only you can answer this – what fee is so low that you’d rather spend that day having a lie-in or a holiday?
For the purposes of this post let’s say that the minimum rate you’ll accept is £250/day.
Now your range is from £250-750 per day.
How can you move this range upwards over time?
Well for a start always quote your top rate when you’re busy. If you’re not really earning enough consider what projects you might take on at lower rates … one of the keys here is not to burn your bridges with cheaper clients when you’re busy and to be humble enough to go asking for work when you need it 
Over the years move the range upwards so that both your top and bottom rates go up! This may require you to drop some of your least well paid work and perhaps the clients that offer it simply because they may not be prepared to pay more for that work and may prefer to hire someone else without changing the rate. Such is the price of success!
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.
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!
Do you have enough income to enjoy Christmas and the January sales?
Wouldn’t it be great if you had a better idea of what your forward income looks like?
Here’s how to achieve a future picture using MyCake or other book keeping systems:
- take each existing project and allocate the fees you’re charging (according to the stage payments you’ve agreed with the client) into appropriate invoices
- date these invoices appropriately i.e. if you’ve agreed you’ll bill a third half way through the project give it a date half way through the project
- then re-order your list of invoices so that they are in date order and you’ll get a summary of what your future cash flow ought to look like (!)
The goal is to end up with a realistic view of your future income by month. The Monthly Income report in MyCake gives a visual illustration for those of us who hate numbers:
Whilst a book-keeping system isn’t a crystal ball to help you work out which projects you’ll win and which you won’t (a CRM system such as Tactile would help with this though) you can use it to look at the patterns in income for contracted projects where budgets have been signed off.
Can the Christmas staff party give you more than a hangover?
Hopefully it’s not too early to ask you “what’s the point of a Christmas staff party?” You’re probably starting to plan one even if it is just drinks after work one evening.
There are some obvious things like thanking the staff and freelancers for their hard work, relief that you’ve got through a tough year etc. etc.
However, if you’re smart, there are some other messages you could be communicating and feedback you could be soliciting. Firstly, if you’re offering the carrot of a slap up lunch or drinks, night out or similar then why not squeeze a bit of extra value out of it for the company and have some kind of discussion meeting or presentation beforehand. It could be a review of the main achievements in the year (comedy moments and candid photographs are an optional extra here), the opportunity to laugh about the main cock-ups now that you have some distance from them and perhaps a bit of looking forward to what you’d like the year ahead to bring.
The latter is the opportunity to seed ideas in the team and give them something to mull over in the Christmas break so that they come back with thoughts, plans and ‘can I just talk to you about…’ conversations.
You might involve staff by asking for their thoughts on these things ahead of the lunch so that responses/votes can be revealed on the day.
Evidently the message here is … go on, think about it, there’s more you can do with a Christmas bash and with not too much more effort.
Do you have a vision for what 2010 will bring?
It’s a good thing to have a vision for the forthcoming year and an even better thing to connect this to a set of sales & development goals and the action plan to realise these goals. This is the first post in a short series on goals & vision.
One might argue that the time in the year that you do this kind of planning depends on when the quiet patches are in your market’s annual cycle or when the end of financial year is. However, as devil’s advocate I’d say that such arguments can simply be procrastination and given the economic climate and election next year (likely to result in significant change whoever wins) really it would be worthwhile to plan now for the calendar year 2010. Plus if you start planning now you can raise discussions of 2010 during the December silly season, Christmas lunch etc and give staff, customers and suppliers something to think about between Christmas pudding and New Year fizz.
So, just to get the ball rolling here are a few questions you might want to set your brain to work on (and for MyCake customers there is the added bonus of using the reports in the book-keeping side of things to look to for some answers and the benchmark results for a point of comparison). Keep a notebook handy and start to make a record of your mental notes.
Translating learnings from 2009 into plans for 2010:
- What have been the highlights of 2009 and how can you build on these in 2010?
- What opportunities has the economic climate brought?
- What hard lessons have been learnt and what changes have/will you make as a result?
- Who was your best client financially? (if you were looking at other criteria would this answer change)
- Who was your best new client financially? (look at the income reports in MyCake book-keeping)
- What has been the 2009 definition of a small, medium or large project/client and how would you like to change this for 2010?
- What has made up the main areas of your cost base, is this as expected, what can you learn/build-on/change for 2010? (in MyCake look at the expenditure reports in the book-keeping area)
Looking forward:
- What is the state of your current pipeline of work? Is it in line with the normal cycle of the market (or whatever approximates to this if you’re being hit by the recession)
- How is your current market changing? i.e. new trends, growth areas, areas tailing off
- Who seems to be doing well, why and what can you learn from this? (on MyCake you could look at the top quartile in the benchmarking and see how you compare)
- Are there new markets or sectors you should be connecting to and what might this be worth to you?
- What is your turnover goal for next year? What will be the impact on profit?
- How is your cost base likely to change (are there big changes you need to plan for – cost of space, staff etc)
- Do you need to plan for some R&D?
- Should you be planning to take in investment?
- What opportunities would a change in government bring for you?
- If the recession continues what is the worst case result for you?
- If we see recovery in the market how well are you positioned to take advantage of this (and what are the markers for recovery in your area?)
One of the messages in all of this is that it is worth looking at financials of the year that you are finishing as a start point for the planning of the financials of the year ahead. You should look at the raw financials (as diagrams if you prefer these to spreadsheets) and not rely on rose-tinted ill-remembered half facts whilst on a train or in a pub!
Where is your thinking time and space?
So, the business is growing – new staff, new clients, bigger projects etc etc. All good and certainly feels like progress. How are your working patterns changing? What are the patterns in how your diary fills up?
I’m asking because in the midst of all this busy-ness you need to make sure that you don’t lose sight of your own need for thinking time and space. It’s all too easy to have a diary so filled up with dancing to the tune of the business that you forget that the business is there to dance for you too.
Where do you think best? Do you need stimulation or quietness? For some people it is the drive to work of a morning that helps them get perspective on the day ahead but to take a longer look they need a few hours or a few days of relative quiet in order to mull over the changes in the company and the trends in the sector. For others it is going to a conference and the stimulation of meeting new people and discussing new ideas that really moves their thinking on. So whilst there is no one size fits all answer there probably is a mode that suits you well. Your partners, colleagues and board members may be different so whilst a board away day works for some others need a long walk or a conference. Not only do you need to work out what suits you but also what fits in with the ethos of the company and the needs of your colleagues.
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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