Spending Money on Paper Before Using Your Company’s Cash
Spend your money on paper first. This is a brilliant concept attributed to Dave Ramsey. Personal expenses and business expenses are ultimately related when you are a business owner.
And even though Dave Ramsey doesn’t focus on businesses, a lot of the same concepts apply to entrepreneurs. Spend your money on paper first. Once you make a list of all of the things that you need to do to accomplish your goals as a business owner, you will see the total and how all the pieces fit together. I can’t stress the importance of this enough.
Asking the Hard Questions Early: Is It Possible for This New Business Idea to Be Profitable?
People often talk about mapping out a business concept on the back of a napkin. Sure, if you have a pretty big napkin you can do this. I’ve actually done this for a friend thinking about starting a business.
We were sitting at lunch and she told me about a really cool idea she had. She wanted to work with children on how to cook.
She’s wonderful with children and loves to cook and wanted to share her love of cooking with kids in a fun and exciting way. A summer camp for learning how to cook. I started cooking as a young person so naturally, I loved the idea! We started talking about the details. Well, she would need a place to do the cooking, and it couldn’t be her house. It had to be a place that had more space and more of an industrial kitchen setup. Then, she’d have to have a certain number of people to supervise to keep the kids safe (kids + knives = plenty of adult supervision required).
Next, she’d have to have the kitchen equipment for them to do the cooking. Kid-safe knives, pots and pans—things like that.
These are all fixed costs of her business. She also needed a website or Instagram account or something to do some advertising to get people to show up. So we budgeted some marketing and sales expenses.
The next thing I did was I added a 15% buffer for things she hadn’t thought of. Because there’s always something you haven’t thought of as a new business owner.
In order to teach kids how to cook healthy meals, she would need healthy, typically expensive, ingredients. We sketched out a couple of meal ideas and their costs to get a sense of how much each class would cost just in food or consumables (cost of goods sold).
We then talked about what she thought she could charge for this camp (revenue) and how many kids she thought she could teach at a time. We discussed how many classes per week she’d have and the cost of renting out the kitchen space per hour. We also factored in clean-up time after and between classes.
Build a Sustainable Income that is Livable: Factor Personal Finance Into Your New Business Idea
Once we put all of the numbers together, we determined that it wasn’t really going to work. No matter how much we move the numbers around we couldn’t find a way for this business to pay for itself (we didn’t even attempt to factor in giving her a salary). It’s a wonderful business concept, but if she really wants to do it, she’s probably going to have to get some type of grant or other support to run the business.
As part of this conversation, we also discussed her personal financial needs. This can be a really tough personal conversation, but knowing how much it costs to live your personal life in a happy and non-stressful way, is incredibly important to understanding whether your business is viable. Your personal financial stress can severely impact your business if you don’t understand what your business needs to provide for you to live a happy stable personal life.
Note: If you need a place to build a personal financial budget I highly recommend mint.com. It’s free, it’s pretty well organized and it’s basically what AutoCFO does for businesses for your personal finances.
Once you have a clear concept of the cost of maybe not your ideal personal life, but a happy stable one, you have a better concept of what kind of business can support that life and doing something that you love.
Building a New Business With Strong Financial Footing
My friend ended up going back to her corporate job, but she did so with a renewed sense of appreciation for what that salary afforded her in her personal life. Before our conversation, she was disgruntled by the amount of time and energy her job took versus her general lack of love for it. Once she realized the job she came up with wouldn’t actually be able to pay for her rent or really even for itself, she knew she needed to come up with a new dream and that her current job was one of the stepping stones to getting her to that next dream.
She started focusing on what she could do with the income that she already had, putting away some savings and thinking hard about the business she wanted to start someday. Having a little bit of savings buffer before you start a business can make or break your business in the long run. If there are a couple of months we need to put a little extra capital into the business or you need to cut expenses (which could mean your salary for a couple of months), this could be what your company needs to get through a really bad dry spell.
Using Pen and Paper Before Starting Your Business
Personally, knowing that I was saving to start a business someday got me through investment banking and some of the worst points in previous jobs. Starting a business is an amazing goal, but it requires a lot of pen and paper mapping out what the numbers actually mean so that you can build a business that’s actually going to work. There’s no sense in starting a dream that is doomed for failure. You can be a small business owner, it just needs to be the right business, at the right time and with the right financial footing.