Starting a business is a risky, often terrifying leap of faith — one studded with sacrifices and countless late nights — and those who dare make the jump tend to hedge their bets. They pad their chances for success by succumbing to the newly-launched-business martyrdom of paying oneself a sliver of their earnings, or not even paying themselves at all (until money is coming in at a steady pace).
This frugal planning can be all well and good for some, but it doesn’t necessarily help the business, or the business owner, in the long run. Smart Cookies Co-Founder Sandra Grahame has built her own business and life around giving others easy-to-digest, real talk about planning finances related to self-started business ventures. Today she’s sharing her tips on how other entrepreneurs and business-launching-hopefuls can plan the life they want to live based on their take-home profit, and have their business (and earnings) follow — and not the other way around. Take it away, Sandra! —Kelli
How to Create Profit by Design
I remember sitting in my bed; my laptop in my lap, my sleeping 4-month-old son beside me. I had just hung up the phone after a life-changing phone call with my four business partners and very close friends who had all agreed to pass the ownership of our business fully to me. I was shaking; overwhelmed with gratitude, excitement and terrifying fear, and doubt.
I got to work that afternoon, moving full speed ahead, determined to make the business a success. I outlined a business plan, a website launch and a product rollout plan. The problem was, somewhere in the [hectic] planning I forgot to plan out what I wanted my life to look like as I built up my business.
When we’re lucky enough to make money doing what we love, its so important to create a profitable, sustainable business plan that will actually help to support us to live that life we’ve been imagining for ourselves. Because it’s much more fun to dive in headfirst to your soul-feeding creative work when you have control over the numbers, and can actually pay yourself what you deserve.
Six years later through a very bumpy learning curve, I’m finally in a place where both my business and my personal bank accounts are healthy and growing. And while I still have a lot to learn, I’m 100% sure of this: I don’t believe in keeping secrets when it comes to business and especially not with finances, and I don’t believe anyone needs to suffer financially or go into debt in order to be a successful business owner or entrepreneur.
At some point your business needs to support and flow with your life, not the other way around.
Create a Profit Goal Based on What You Need
Holy smokes, was this a game-changer for me. I spent years trying to run a business based on what I thought a successful business should look like which, for me, had a lot to do with how much money the business earned — not how much I was actually able to bank and pay myself. I had huge amounts of shame and guilt around paying myself anything from my business, let alone designing an entire business plan around paying myself.
But the clarity I gained from switching my mindset to profit has created the ease in my business and my life that I was desperately craving, and was essential for me to continue to grow my business. Because for your own health and sanity at some point your business needs to support and flow with your life, not the other way around.
First, before you crunch any numbers, think about what success looks like in your life. And I’m not necessarily talking about business success; instead your life that exists beyond your business. What would change in your life if your business was a success? What does it feel like to you to be a success?
Now, how much money do you need per year to comfortably live the life you’ve described above? The key here is to focus on how much YOU actually take home to live.
One year ago I made the decision that in order to continue with my business, I would need to contribute 50K a year to my family. To do that, I would need more than 200 members in my online workshops. Voila, my goal came to life.
Smart Move: As you crunch the numbers to determine how much money you need to pay yourself, don’t forget to include your personal expenses — the self-employed sometimes overlook healthcare payments and retirement contributions, not to mention maternity leave contributions and childcare if you plan to have a baby or grow your family in the near future.
Your Numbers Are Magic
Over the years I’ve learned to find beauty in the numbers. This wasn’t always the case; looking at expense breakdowns and profit and loss statements used to make my heart race. Handling cash used to make me break out in hives. So I get it, facing the numbers is not always easy, but I’ve learned over the years that the numbers will own you until you face them head-on and design a plan to control them instead.
Here’s how to do that and get to know your numbers:
There are two kinds of expenses, fixed and variable. Fixed will be part of every post, project or product you create. Some examples might be web hosting, supplies, insurance, equipment, etc. Variables fluctuate depending of the type of project you’re working on, like travel, hiring consultants or freelancers, packaging postage, etc.
Knowing what all of your expenses are is crucial to planning your break-even point. And don’t forget to note all those little hidden expenses that are easy to overlook like web hosting, even the gas for your car to get you to where you need to go.
And a super important number that’s easy to overlook but so important to get a handle on is your tax bracket, so that when April comes around you can stay a cool cucumber. This will depend which tax bracket you’re in, which is income-based. Use a search engine and type in “tax bracket 2018” and determine where you fall.
Smart Move: Your business needs an emergency fund too, or as I prefer to call it the “beauty sleep fund” (because there’s nothing more beautiful than a restful sleep without money worries). So plan to save at least three months of operating expenses and set this money aside in a separate savings account so you’re not tempted to spend it.
Getting a firm grip on these numbers is the best way to create a sustainable business that works for your life.
Price According To Your Goals
Knowing what you need to pay yourself and your expenses sets you up to figure out how much you need to charge in order to succeed and live the kind of life you want to live. Yep, we’re talking about basing your pricing on what you need to live the life you want. Unreal, right? I promise you, your work and the life you want to live is worth it!
Take your desired pay and add the taxes you estimate you’ll owe based on your tax bracket.
So for example, if I want 50K pay and my tax bracket is 20%, I estimate my yearly taxes to be 10K. (50K+ 10K = 60K)
Next, add your total expenses (fixed & variable) for the year to the number above.
For example, I have 48K in expenses a year including childcare.
Add up the numbers above (desired profit + taxes + all expenses). (50K + 10K + 48K)=$108K
Lastly divide that number by either the ideal amount of hours you want to work in a year (if you charge hourly), or the number of customers you would ideally like.
So for example, on average I knew it was realistic to have 200 customers per year. (108K/200 =$540)
I knew I needed the majority of my customers to pay my desired price of $540 in order for me create a business that worked with my life.
Are these numbers terrifying to crunch? YES! But getting a firm grip on these numbers is the best way to create a sustainable business that works for your life. If you think there’s no way you can charge the number you came up with, not to worry! Of course I’m a big believer in charging what you’re worth, BUT you can also make that number smaller and more workable by lowering your expenses and being super intentional with every penny you spend, or lowering your desired profit (just don’t forget to boost this back up once things get rolling!).
For me, knowing these numbers gave me the clarity I needed, and lit the fire I needed to bring my business and my life together on my own terms.
These numbers are not set in stone, but are meant to give you a starting point to gauge what to charge for your beautiful, unique, valuable talent.
Keep in mind this guide works if your profits will support you to live your own version of success, whether it’s living remotely and traveling across the world, or putting down your roots to build your dream home. It’s designed to make you feel financially comfortable as you build and grow your business.
Having your own business is brave, and so is creating a specific plan based on what you want and need. The fact you’re even reading this shows just the kind of smart, resourceful person you are, so I know you’ve got this, and I’ll be cheering you on!