5 KEYS TO CREATING A SUCCESSFUL FINANCIAL STRATEGY

You can't grow a successful business without a sound and reliable financial strategy.

You can have all the best marketing and sales occurring in your business, but without sound financial planning, your business will eventually fail. I learned this the hard way years ago when I was running my own business. I was great at maintaining our website and made it SEO-friendly. I even got it to rank on the first page of Google. I was also pretty good at sales and onboarding new customers.

But the area I failed the most in was finances. I took out nearly $40,000 in credit card debt, and $30,000 for a new car loan. I fell behind on payments for one of the employment agencies I used by over $12,000. I ended up having to borrow money from family to pay back a lot of my creditors, and lay off all four employees that worked for me. I shut my business down. It was one of the most difficult seasons in my life as a business owner.

I hired a bankruptcy lawyer because I figured there was no way to pay back all my business debt. About a year into the process, my wife encouraged me to avoid bankruptcy and pay off the debt I owed. I listened to her, and called all of my creditors to work out payment plans. As of this blog writing, I am down from $82,000 in credit card debt, loans and back payments, down to about $8,000, and am projected to be paid off by the Fall of 2025.
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I am passionate about making sure new entrepreneurs don't end up in a financial mess like I was. Since shutting down my business, I've determined to learn everything I can about having a healthy financial business plan. I've talked to accountants, executives of successful multi-million dollar companies and have taken many classes on business finances and read many books on the subject.

This doesn't make me an expert by any means. I prefer viewing myself as a committed student in the area of finances. But over the years, I've distilled all the lessons I've learned into five essential keys that every business, big or small, needs to have in order to be successful. If you apply these five keys to the financial part of your business, you will grow and won't have to worry about going into debt or ending up in the red. So without delay, let's jump in.

1. OWNER'S REVENUE
First, determine what you would like your monthly revenue to be each month for yourself. This is called owner's take home pay. The best way to do this is to calculate your home bills and decide how much you need to make to pay these bills.

If you're still working full time somewhere and can't afford to quit your job yet but still want to focus more time on your business, you might create a smaller owner's revenue plan that's half of your bills. This will allow you to gradually go from full time to part time at your current job and eventually transition out of it into working in your business full time.

2. ESTIMATE OF EXPENSES
Next, make a list of all the possible business expenses you'll need to account for when running your business. This can include everything from cost of supplies, legal fees, traveling, rent or taxes. Below is a list of general costs that most businesses budget for:

• Office supplies

• Maintenance and repairs

• Taxes

• Bank fees

• Dues and subscriptions

• Insurance

• Marketing

• Payroll

• Business travel

• Legal fees

• Advertising expenses

Taxes can be a little tricky when trying to calculate a cost because it's a variable amount - meaning, it various depending on how much revenue you actually make and how many expenses you actually pay for. The easiest way for me to calculate it is to multiply 25% of my owners revenue. So if my desired owners revenue is $4,000 per month, than my anticipated taxes will be $1,000.

Just remember that the more revenue you make, the more your tax bracket goes up, so be sure you take a look at what your percentage is by seeing which tax bracket you fall under. You can do this by visiting the IRS's website.

Prioritize your expenses
My big failure in finances wasn't failure to create a list of expenses. My big failure was in that I was spending money expenses that didn't matter to my business. For example, I rented out a large office for $450/month when I could have easily worked from home until my sales gained traction.

The most important part of your expense list is prioritizing your expenses by what matters most. Avoid spending money on company meals, brand new equipment (when you can get used equipment for half the price) or fancy blingy stuff that doesn't help your bottom line grow.

3. SALES TARGET
Next, combine your owner's revenue and estimated expenses (so if owners revenue is $4,000/month and estimated expenses is $1,500/month, the total would be $5,500/month).
After you combine the two amounts, I recommend calculating one more amount in their called your growth goal. Your growth goal can be any kind of percentage, but most companies aim for 10% to 20% per year. Let's break this down before arriving at our sales target, which I promise we'll get to.

Growth Goal
If your owner's revenue and estimated expenses are $5,500/month, then that results in $66,000 per year. To get your growth goal, you'll determine what kind of sales percentage you'd like to grow by within one year. If you choose to grow by 10%, then your growth goal is $6,600 in one year. $6,600 broken down into 1 months results in $550 extra each month.

Sales Target
Now that you have your owner's revenue, estimated expenses and growth goal, combine them together. They should look something like this:

• Owner's revenue - $4,000/month

• Estimated expenses - $1,500/month

• Growth goal - $550/month

• SALES TARGET - $6,050/month

You might be thinking this amount feels to large for where you're starting out at. Don't worry, each person's financial plan will look different, but if you're wanting to work full time at your business, your monthly sales target will be bigger than you probably expected.

4. OFFERING COST
Deciding how much to charge for your offering is critical to either succeeding or failing as a business. Whether you're selling a physical product or trading your time for a service, you need to consider two factors that play a part in making up your pricing: The cost to produce the offering, and the profit you want to make.

This can be difficult to determine when you're first starting out. If you price your offering too low, you won't make the profit needed to scale your business. If you price it too high, your customers may choose your competitors.

The best formula I've come up with for price for either your product or service is by factoring in the following areas:

• The cost of production

• The percentage of profit you want to make

• Average your highest and lowest competitors prices

• Average out your percentage profit and competitors pricing
  

Let's break these areas down in more.

The cost of production
If you're creating a product and selling it, you need to factor in the cost for tools, supplies, shipping materials and even sales tax. You also need to calculate your time spent creating the product. I would base the time spent creating the product close to your state's minimum wage, or, the standard hourly pay for employees in industries similar to yours. You don't want to charge based on how valuable your time is to you, because it's priceless. Plus, you will receive profits from your products as you sell more of them.

The percentage of profit you want to make
Next, factor in the percentage of profit you'd like to make based on your cost of production. As a rule of thumb, if your product can be mass produced (like a thousand units per hour) then your profit percentage should be much smaller. A good percentage range can be anywhere from 2%-5% for mass produced products. If it takes a lot of time to create one product (two or three units per day) then you want your profit margin to be much higher. A good percentage range can be anywhere from 50%-150%

So, if the cost to create a product unit is $35.00, and you can create 10 product units per day, then you might choose a desired 50% profit margin, which would be $17.50. So the total cost of your product would be $47.50.

Average your highest and lowest competitors pricing
To refine your pricing even more, do some research and get an idea of how much your competitors are charging for the same product or service you are. Let's say a high-end competitor is charging $65.00 for their product, and a low-end competitor is charging only $35.00. The average for these two prices is $50.00.

Average out your percentage profit and competitors pricing
As the last step, take your first product price of $47.50 and average it with the $50.00 from your competitor's pricing. The amount should be $48.75.

5. BOOKKEEPING PLAN
One of the reasons I got so far behind on my credit card payments was because I didn't have a good bookkeeping process in place. I had no idea where my money was going and didn't keep track of it. If I would have had a better bookkeeping plan, I would've been able to see right away that my expenses were outweighing my revenue, and that I needed to either reduce my expenses or increase efforts to bring in more revenue.

Essentials to having a successful bookkeeping plan
If I could start all over again, I would create a bookkeeping plan that included the following guardrails:

• A revenue sheet
  I would record every sale made from my customers, including the date of the payment as well as my invoice number for my client. If I was using something like Venmo or Zelle to collect revenue, I would record the transaction ID # with each payment.

• An expense sheet
  On the same sheet but different column, I would record every purchase I made, including the date, vendor name and category it went under (office supplies, advertising, taxes, etc).

• Monthly Total revenue and expenses
  At the end of each month, I could tally the revenue and expenses and see how close I was to meeting my monthly sakes goal of $6,050. Knowing this information is critical to understanding the health of your business's financial state, and would allow you to make pivots as needed to met your monthly sales target.

Accounting and taxes
Accounting and taxes rely on good bookkeeping records, but they are different and more complicated. I would consult with a professional accountant or CPA and hire them to take care of this part for you. But the good news is that if you're already taking care of your bookkeeping, their services should be less expensive.

6. TRENDS AND INDICATORS
Even if you're a small business, being able to read and leverage trends and indicators about your customers and market will help you make wise decisions for growing your business.
When I ran my business, I wasn't good at leveraging indicators, but I did have an understanding of how my market's trends worked. This helped us prepare for slow and busy seasons, and when you learn to leverage both of them, they will help you as well.

Trends and indicators help in the following ways:

• Identify certain behaviors or decisions from your customers
  For example, you might notice that your customers are either cutting back on your services, or increasing their spend. If a long time customer is cutting back, this could be an indicator that your services could use some evaluation. It may not be the service, but it warrants some investigation.
  

• Identify purchasing shifts in the market as a whole
  If you notice multiple customers making the same change in their purchasing, this should tell you something is happening through out your entire market. Increased sales could mean the economy is booming, while declining sales probably mean people are being cautious about how they spend their money.
  

• Identify seasons of probable decline or growth in the market
  If you can get an idea of shifts in the market as a whole, you can start recording what seasons of the year these shifts occur and then plan your sales and marketing efforts around these seasons. For example, the summer might be a slow season for someone selling homemade purses and bags, but it might be booming for someone who runs a theme park. If you know when your seasonal dips are, you can prepare ahead of time for these, and when you know you're going through a temporary sales surge, you can wisely put aside extra revenue for the slow seasons.
  

• Identify the average value of your customers for sales planning
  This is very important for meeting your sales target. Each customer might spend a different amount per month or year, averaging your spend per customer will allow you to become better at creating a sales and marketing strategy.
  For example, if your monthly sales target is $6,050, and your average value per customer is $100, then you know you need to find a little over 60 customers before the month is over. That's 3 customers per business day in a month. Breaking these numbers down will help your financial goals become more measurable and attainable.
  

• Identify your company's strengths and weaknesses
  Collecting and evaluating your trends and indicators can also give you some insights on the quality of your offering you provide. For example, if no one is purchasing Offering "A", but everyone is buying Offering "B", then that is an indicator that they're not finding enough value in Offering "A", and you should evaluate it to see how you can make it more attractive. This also allows you to see that Offering "B" is very valuable to customers, and you should learn more about why it's successful and possible spend more on advertising it to increase revenue.

DOES FINANCIAL PLANNING FEEL LIKE A HEADACHE TO YOU?

Letting me be your business coach might be a good option for you!

I help both new and small businesses create a successful business plan which includes developing a financial strategy customized for their company. For a free coaching session, schedule a call, and let's grow your business together!