Saturday, March 24, 2012

How Much Money Do I Need & When Will I Make A Profit?

These are questions we hear all the time from clients and getting to grips with the both questions fully will help to determine whether or not your business will be a success.
1. How Much Money Will I Need?
Let’s start with getting things up and running. You will need to calculate your initial set up costs, some of which will be one offs and some will be recurring especially for the first year.
Some of the costs you need to think about are on the business start-upchecklist which is attached to every coaching newsletter andinclude as an example:
  • Setting up a limited company
  • Creating a logo or brand
  • Setting up a simple website
  • Seeking legal and financial advice
  • Registering for VAT and PAYE
  • Registering as a Data Manager if you’re setting up a website
  • Marketing costs, including web marketing costs
  • Finding and setting up physical premises
  • Any professional qualifications
  • Any professional insurance
  • Finding and hiring staff
  • Stocking up on raw materials or products
  • Finding manufacturers or suppliers and the cost of setting up contracts
  • Your regular costs, which you will need to keep a good handle on include:-Rental charges, Council rates and other premises charges-Insurance for premises-Cleaning and security for premises-Utilities costs including access to telephone and internet services
Once you have your complete list, work out your initial set up and recurring costs from before the launch date right the way through the first year. This will be your cash-flow forecast and is absolutely vital to success. Whatever overall monthly figure you end up with add on a contingency amount of between 10-20% as these estimates are rarely 100% correct. The best advice is always to work to the worst case scenario in terms of cash planning as much of the cash flow forecasts are based on factors outside of your direct control, for example VAT and other taxes.
Most of you will know that gross profit is the amount you have left once all your costs are taken off. Your business will break even if your gross profit is the same as your costs. This should now give you a good idea of how much you need to sell in terms of goods or services in order to start making a net profit (your gross profit after the deduction of all taxes).
Therefore to calculate how much money you need you need to work out how much your monthly costs will be in total and how much you will need to sell to cover this amount. Chances are that for the first 6 months to a year you may not sell enough to cover all of your monthly expenses. With this in mind you will also need to budget for additional investment into your business to cover this possible shortfall, at least for the first 6 months to a year dependent onyour sales forecasts.

2. How Much Profit Will You Make & When?
Obviously calculation of such a figure and date is not an exact science (otherwise we would all be Alan Sugar). Therefore treat any estimates with caution as youl earn more about how your business is faring post launch. However based on any market research you have already done (which we covered in an earlier post) you should have a reasonable estimate of how many sales you may be able to make within your chosen customer base and within your distribution area.

Remember though this is an estimate and marketing plans take awhile to start working, so unless you are the next Bill Gates profits will take a while to come through. In the case of very successful businesses this can take years…that said you will should link your cash flow estimates outlined in part one with your income/sales estimates so that you can work out your break even point and how much you need to initially invest to keep the business going.

This next phase of building your business really is critical for success.
We also help businesses by creating bespoke workshops that help youto work through the initial set challenges as a team. If you would like to know any more about this service, please get in touch by phone or email.

So your next plans should be to really get to grips with your estimated cash flow and to get a good handle on how much money you need to invest up front and going forward. More importantly you should also by now start to have a better idea ofwhat profit you may be able to make and when this likely to come through.

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