Day 8 – Viability and Budgets

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Hi Victoria here from the Zest for Success, The Bookkeeper Hub, and HBA Encompass.  Again I’m sitting in my car making the best use of my time.  This morning I’m at swimming training rather than a school pickup.  I thought I’d take the opportunity to have my daily chat.  So yesterday we talked about your product and processes.  Today we’re gonna talk about business viability.  I’m gonna try really hard not to bore you to tears with numbers because I’m an accountant.  I’m a bookkeeper.  And I get off on that kind of stuff but I understand that not everyone does.  But before you start your business, before you go and rent premises, buy stock, print t-shirts, hire staff, whatever it is that you gonna do, you need to make sure that your business is viable.  And when I say viable, I mean is gonna bring in enough money and make enough money out of whatever product or service that you sell to cover your overheads, pay you a wage to live on, and then pay back whatever startup capital you get wherever that comes from.

I know that we bootstrapped The Bookkeeper Hub which means that we basically put one credit card aside and said this is gonna be our seed funding.  Everything we have has to come off that so we need to make sure that we could pay that back in a reasonable term.  Because credit card interest is really hard, really high but when you start up businesses, the funding comes from all over places.  And I’m gonna talk about that in another chat that we’re gonna have.  But it doesn’t matter where it comes from.  You’ve got to make sure that you are viable enough, that you can repay that in a short period of time or the time required by the bank.  So when we’re talking about viability, it comes down to a cash flow budget.  I get that not everyone gets off on budgets but I’m talking about a simple budget to make sure that what comes in will cover everything.  So when we’re talking about expenses for a budget there’s a couple of things that we need to talk about.  And yeah, I’m sorry if it’s boring but it’s really important because there is a big difference between them and the way they are threated.  So the first one are your fixed costs.

Fixed costs are things that don’t change week in week out or change depending on the amount of product that you’re selling.  So things that would be fixed costs would be rent, full-time staff, electricity, printing and stationery, and computers.  Anything like that that doesn’t change.   So you need to work out an estimate of what your fixed costs are going to be for your business.  And that’s gonna be hard in some instances because you may not have the experience to know what your electricity or telephone bills gonna be.  And that’s we’re talking to an existing business owner, an accountant, a bookkeeper, or a mentor can give you an idea of what type of figures you need to budget for to cover these expenses.  The next type of expenses that we’re gonna talk about are variable costs.  That sounds like a really horrible accounting term.  But what they are — are the costs of you doing business that change depending on how much product or how many services you sell.  So for a plumber, it may be the amount of materials that he’s gonna buy to do the job that he’s gonna do.  For someone still in selling stubby coolers, the cost of the individual stubby coolers that he needs to cover.  When you think about that you go ‘Oh, stubby coolers are just $4, I’m gonna sell it for $6’.  That’s easy but there’s little things that come into it which come up when you’re looking at what your budget is and how viable your business is.  Because if you’re starting off and starting off small, you don’t get the same kind of discounts that big businesses get.  If you’re buying a hundred stubby coolers, it might be $4.  If you’ll buy a hundred thousand, it might be $2.  So you need to have a think about what your variable costs are and do a little bit of research into these things as to what you think they’re gonna cost that you need to cover.  So what you need to do is to have a spreadsheet which has your sales less your variable costs which gives you a gross profit, then your fixed costs.  And then, we take off wages for yourself and then we take off loan repayments to pay back your startup capital.  And if you can see that your business is going to be in a positive position going forward, you know you’ve got something that’s viable.  Now, we’re gonna get into budgeting much much deeper down the track and the tools and the tricks to do it.  I just needed to give you an idea of how it works.  Just before you go, I just want to have a bit more of a dig in into variable costs and gross profit because they’re pretty heavy accounting terms that most people they’re eyes glaze over.  I get that but just to put it down into layman’s term and to try to explain to you what it means.  So I’m gonna go back to my stubby coolers example.  If I know that I can get stubby coolers printed to sell for $4.  And then I know that I can sell it for $6.  Then I make $2 out of every stubby coolers that I sell.  Two divided by six is one-third which is 33 and 1/3.  So what that means is for every stubby cooler I sell, I make 33% and then that money can be used to pay off my operating costs — my rent, my electricity, my staff wages, and my wage.  So when you’re working out your viability it’s better to work from the bottom up.  So you start with having zero money left at the end of the month.  Then, you put in all your fixed costs.  Then, you put in a total so you know what that is.  And that’s what your gross margin needs to be which is how much sales less products that you need to cover your operating costs.  Then if you know what percentage of costs are that your stubby coolers are, say 67%, you can work backwards to know what your sales are.  It’s up to you to make a decision as if you can make that level of sales to make your business viable.  So I’m hoping you can and that I’ll have a chat to you tomorrow.

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Day 9 – Capital Budgets

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