From The Blog

First Down?

“Can you imagine a football game where they don’t keep score? That’s what most businesses are,” Chuck Richards, CEO of CoreValue Software says.  Running a business can be like playing a game with no scoreboard.

Marcus DiNitto, the Contributing Writer for an article published by The Business Journals in June 2017, interviewed Richards who identified three smart ways that increase value by fixing operational elements of an organization. Click on this link to read the full article and download a free assessment tool.

The Market, The Processes, The Metrics

According to CoreValue, nine out of 10 business owners who complete the assessment program (see free assessment tool) do a poor job documenting their market.  Why is this important?  It enables the business with internal communications so every employee is on the same page.  If borrowing funds or selling the business, the information shared externally is key to the outsider(s)’ financing or purchase decisions.

When goods and services are sold, the business promises to deliver to the customer what they purchased.  There should be documented processes in place to ensure this delivery of goods and services.  Every business should have a back-up plan so that operations are not reliant on any one individual, particularly solely reliant on the owner.

“A business owner has an obligation to make sure employees understand the company’s goals and objectives and how they are helping the company reach those goals and objectives. Rarely do companies have effective metrics of performance,” Richards said.  “…employees almost never know if they are winning or they’re losing at work, so they tend to keep busy. But it’s not very productive; it’s not very targeted.”

Knowing the company’s goals and metrics for success makes the work more fun, not only for the owner but also for the staff.

Big Hairy Goals

Remembering when I first started working at a large national bank, we had lots of meetings – meetings about new loans in the pipeline, new employees and organizational changes, and the bank’s financial benchmarks.  At the time the bank’s Return on Equity (ROE) was roughly 6%.  Return on Equity is calculated as Net Income divided by Net Worth.  I distinctly remember one meeting when a new CEO and Board Chairman had been chosen.  He came right out of the chute and said our five-year target for ROE was 21%.  Yowsa!  (We thought he was crazy.)

Five years later we were right at 22% ROE, having exceeded our goal.  What an exhilarating feeling it was to work as a team and make good things happen.

Think about your business as if you were playing football.  What are the plays to make the next first down?  Does your staff know what the plays are and how to score?  For more information on how to fix operations and set metrics, contact Nita Black at (901)413-1315 or go to her website at www.NitaBlack.com.  You can also find Nita on Facebook, LinkedIn, and Google+.

Experience success!


NIta Black, CEO/Business Strategist
www.NitaBlack.com

“We provide business tools to help clients monetize their ideas.”

“Learn how to sell.  It’s the best investment you will ever make.  Mark Cuban says so.”  This is a quote from Jeff Haden’s article at Inc.com (August 2017) – enjoy the short video interview of Mark Cuban, billionaire investor, NBA team owner.

You need an angle – email me at info@NitaBlack.com #businessstrategist if you would like to discuss.  You need a sales budget.

How to Budget Sales.

One way to get an idea of a reasonable sales budget for a startup is to look at the industry data. Starting with census data, even though it is always dated, will help a start-up know how many companies are out there and average sales. Go to www.census.gov to pull Sales/Receipts by NAICS industry code. Start with the U.S., then the state, and then MSA and/or county to review geographic reports. Look at the total number of companies in each geographic area and calculate average Sales/Receipts per firm.

The industry information tells you how much was sold by your competitors.  It helps clarify the size of your target market, in dollars spent with your competitors by potential customers.  White papers and other research should help you estimate sales – a key line item in your budget.  The Sales Budget helps you set goals for all other line items in your budget.

Choose the information that is most relevant and comparable to the startup. Assume that it will take at least three to five years for a startup to reach the average Sales/Receipts per firm in the industry. Be conservative in your sales estimates. Consider preparing at least three scenarios of most likely, best case, worst case estimates so that appropriate planning can be considered for required capital, labor, and other resources.

Often, cash flow problems arise because of high growth as well as low growth.  Below is an example (see case study) of how the industry data can be used as a basis for the Sales/Receipts budget.

Sales Budget Process – Case Study.

The Market – XYZ Flooring Company is part of the Construction sector 23, doing business as a specialty trade contractor classified as NAICS 238330 and competing in the Memphis, TN MSA. Can you see how this information maps?  We start with the Construction sector, then choose a specific trade within the total sector.  Next, we look at the US data, data by state, data by Metropolitan Statistical Area (MSA), data by city and/or county.  These levels of information usually tell us something that helps us compete for customers.  We choose the most relevant data, based on the company’s mission and vision.

The Sub-Sector – The construction industry sector has three major groups of companies – (1) Construction of Building (236), (2) Heavy and Civil Engineering Construction (237), and (3) Specialty Trade Contractors (238). Specialty Trade Contractors include flooring, as well as poured concrete, structural steel, framing, masonry, glass and glazing, roofing, siding, electrical, plumbing and HVAC, drywall, painting, tile and terrazzo, finish carpentry, site preparation, and other specialty trade contracts.  Within the 238 sub-sector, there were 39 Flooring contractors reporting under NAICS 238330 in the Memphis MSA for 2009, according to the U.S. Census Bureau. These businesses employed 175 workers with an annual average payroll of $6.9 million.

Geographic Region – XYZ Flooring competes for business primarily in the Memphis MSA, although growth is expected through sales in the three states of Tennessee, Arkansas, and Mississippi. 2007 information reports 187 flooring contractor businesses in the state of Tennessee, 67 flooring contractors in the state of Arkansas, and 42 in the state of Mississippi. Average annual sales size per business is reported as $917,000 by Tennessee companies and $652,000 by Arkansas companies.  This lets us know what may be a reasonable sales budget for XYZ Flooring.

Base Budget Plus Future – As a startup XYZ Flooring’s Sales Budget assumes it will take five years to reach the average Sales of approximately $652,000. The first-year sales are $385,000 based on 5 to 6 retail (consumer) orders per month at $2950 average price per order. Approximately one-half of the annual sales are retail resulting in a total retail sales budget of $194,700 annually. The remaining sales budget of roughly $192,500 includes 10 commercial orders a year at $19,250 per order. The company’s budget is based on an 80% pipeline of orders already placed, with 13 retail orders or $38,000 lined up for the first quarter plus $46,200 in pending commercial orders.

Growth Assumptions – Our source of referrals for both retail and commercial customers are well-established and are believed to support the current Sales/Receipts Budget. An annual growth of 10% for the first five years is assumed conservative, based on industry data provided by xxx Flooring Association which indicates recent historical industry sales growth of 12% to 15% per year.

Frequently Asked Questions (FAQs).

As the startup builds a track record each week, each month, each quarter, and each year, budgets should become more reliable. Who knows, a startup may outperform the industry in the first year so using several scenarios will help predict company needs and avoid crisis management.  Below are a few FAQs to help you as a startup.

  1. How do I calculate Breakeven Sales? Breakeven Sales in dollars is equal to Fixed Expenses divided by Gross Profit Margin.
  2. How do I calculate Gross Profit and Gross Profit Margin? Gross Profit in dollars is Revenue less variable Cost of Sales. Gross Profit Margin as a percent is Gross Profit in dollars divided by Revenue.
  3. How do I calculate Net Profit and Net Profit Margin? Net Profit in dollars is Revenue Less Total Expenses. Net Profit Margin as a percent is Net Profit divided by Revenue.
  4. How do I calculate Breakeven Sales plus $100k Profit? Breakeven Sales in dollars plus $100k Profit is equal to Fixed Expenses plus $100k divided by Gross Profit Margin.
  5. What costs are typically included in the line item variable Cost of Sales? Variable Cost of Sales includes materials and labor costs which vary with Revenue. For example, a $10 widget may have $3 in material cost and $3 in labor cost for a total of $6 in variable Cost of Sales per widget.
  6. What is positive Cash Flow? For example, Client ABC orders 100 widgets at $10 each which equals $1000 in Revenue. Client ABC pays Startup Business XYZ on the date of the order. Business XYZ has thirty days to pay Vendor to purchase product and twenty-five days to ship to Client ABC. Positive Cash Flow in this example is $1000 for thirty days until payment by Business XYZ to Vendor is made.  It’s great if you can collect money from your clients first and then pay your vendors and your people later.  That way you have cash in the bank before you actually need to spend it.
  7. What are Fixed Expenses in a Business? These are typically rent, utilities, insurance, office staff, W-2 employees, and other expenses that must be paid each month, quarter, or year, regardless of the level of Revenues in the Business. It is important to hold fixed expenses at a very low level, in the case of most startups.
  8. Why does a Business need research? Research should answer questions that help a Business compete and survive long-term. These are questions like (a) Who am I competing with, (b) Where are my competitors and what do they “look like”, (c) What are my target clients buying, (c) Who can pay for what I sell, (d) How much will they pay, (e) How much are my competitors charging and many other questions.
  9. What is a Sales Plan? Unless clients are begging you for business, typically, you must go find them. You must evaluate who your “best” client is and how to reach them. Where do they live/work, what do they do, why will they do business with you, and how will you reach them? The sales plan includes who you should contact, how often contacts should be made, in what ways should you contact, what actions should be taken over what period, and what goals within what timeframes can be reasonably attained.
  10. Why is a Sales Forecast important? A financial forecast starts with the Sales Forecast. This can be based on industry data, regional demographics, or other information. The goal of a good Sales Forecast is to estimate the financial performance of a Business for the coming day, week, month, quarter, year, or years. It helps set the expense budget for the same period. If actual Sales are significantly less than the Sales Forecast, the management of expenses becomes even more critical for long-term survival of a Business.
  11. Why is a Marketing Plan important? A Marketing Plan has several core components that, when completed by the Business Owner, will clarify how to reach clients that will buy from you. A Marketing Plan includes the estimated cost so that you can budget for these expenses. It is an integral part of the Business Plan, identifying the unique selling proposition of the business, the competitors of the business, and strategies to connect with and/or retain clients so that the Business generates adequate revenue to operate in a profitable and successful manner.

Learning how to sell without a Sales Budget is like learning to water ski with no boat.  Your sales budget will clarify what products and services are sold and which ones drive the most revenue.

For more information on building sales and other business strategies, contact Nita Black at (901)413-1315.  You can also find Nita on Facebook, LinkedIn, and Google+.

Experience success!


NIta Black, CEO/Business Strategist
www.NitaBlack.com

“We provide business tools to help clients monetize their ideas.”

Imagine building this bridge with no pics and no plan.  No research, no second opinions.

This is what we mean by Top-Down – starting from “what it looks like” to adding in all the details, to adjusting with improvements that make it better.  In this blog we use the numbers to paint the financial picture first.  Next we identify the sweet spot – the core business that makes us happy and makes us more money.  From there, it’s organize, clarify, and then share our dreams through a written plan.  A living, breathing, ever-evolving plan for success.

Are you ready to go for it?

Tip #1 – Begin with the numbers.  Use a simple spreadsheet to put a monthly cash budget on paper. There are many free resources on the web.  The one I use the most is an Excel spreadsheet which you can download from Microsoft Office Online.  It is a one-page tool to help you estimate cash in and cash out.  SCORE also has a very good template which compiles data assumptions, keyed in by the business owner.  The data is then used to create pro forma financial reports (automatically created in the template, yeah!)

The key components of the initial cash budget include Sales, Number of Sales in Units (e.g. # Widgets Sold), Average Ticket Price Per Sale, Variable Cost per Sale, Gross Profit, Overhead, Net Profit or (Loss).

If you have ever prepared a plan for a lender to review, he/she will quickly look over the first couple of pages and then flip to the back of the plan to look at your numbers.  Even though we are working on the numbers first, they will go in the back of the plan, once completed.

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Tip #2 –  Take the numerical budget and begin writing your business story narrative, to create your business plan.  Describe your sweet spot – what you do really well, that you love to do, that people will pay for.  Then think about your end game.  When – not if – you are successful, what is your exit strategy?  An exit strategy can be “go public” or “leave legacy for my family to continue to operate a profitable business” or “sell to a major corporation within 10 years.”

At this point you should have completed the initial draft of a numerical budget, the description of your sweet spot, and your end game or exit strategy.  These three things make up the foundation of your business plan, upon which you can now create the rest of your plan.

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Tip #3 – Do research by googling to answer questions about your budget, your industry, your competitors, and your prospective clients.  Set up a cloud-based repository for documents, such as Dropbox.com, so that you can organize information first and then pull bits and pieces of relevant data into each section of the business plan.

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Tip #4 – Most business strategists suggest that you write the Executive Summary last.  My recommendation is to go ahead and write out your top-level vision (in the form of an Executive Summary) by completing a paragraph on each major section in the Plan.  This way, assuming you have completed the numbers in Tip #1 above, you now have the first draft of an Executive Summary which we will call a Business Review (temporarily) along with a basic cash budget.  This does not mean that your plan at this point is complete.  This is only the beginning.

Major sections in the Plan include

(a) Company Description – What products and services do you sell?   What is your mission and vision of the business?  Include your sweet spot in this section of the plan.

(b) Management Team – Who leads the team?  Who will follow?  Who is needed to round out the Team?  Include years of experience, types of expertise represented in the Team, and education of key members of the Team.

(c) Target Market – Who do you sell to?  Where are they located?  What do they like?  What do they need?  Why do they spend money and what products and services do they buy?

(d) Competition – Who does the same thing that you want to do?  Who else solves the problem that you solve, through the sale of products and services?  If your answer here is, “I have no competitors.” – that answer will be FALSE!  Everyone in business competes with someone.

(e) Marketing – What is your USP – Unique Selling Proposition?  Where can you reach your potential clients, through what media (such as online, television, radio, print materials)?  What are your marketing needs to reach how many people in order to sell what you need to sell?

(f) Sales – What is your sales plan, who is your sales team, and how are you going to build your pipeline of clients?  What is the timeframe to scale your business to the next level?

(g) Operations – How will you deliver the products and services that you sell?  What kind of quality controls will you have in place?  What are your fixed operations versus operations variable to sales?

(h) Finance – What are your gross profit margins, your breakeven sales, your overhead/fixed expenses?  What internal controls will you have in place to protect all assets, including cash in the bank, equipment, intellectual property?  Include your draft numerical budget in this section of the plan.  Return to the budget periodically to fine-tune, as other parts of the plan develop.

(i) Future Developments – What does your business look like one year out?  Three years out?  Five years out?  Ten years out?  What technology, new equipment, or systems have you identified that need to be explored, once the company can afford to invest due to planned growth?  Include your end game, your exit strategy, in this section of the plan.

(j) Appendix – What core business forms will you use?  Create or pull samples to keep organized as part of the business plan.  Key documents to gather may include a copy of the lease agreement, copies of vendors agreements, resumes for each team member, website content and social media documents, employee handbook, company policies and procedures manual.

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Tip #5 – Once you have drafted the Business Review (as outlined in Tip #4), sleep on these thoughts for several days. Go back and review to edit your thoughts and clarify what you want your business to look like.  Then begin to pay attention to more and more details.  The next steps to completing your plan will be the most tedious for most entrepreneurs.  A lot of us are dreamers and think big.  We hate to slow down to describe all the details to someone else.  But guess what?  This makes up the guts of the plan, all those tiny details will make a difference between success and failure.

Use the concise description of each plan section included in the Business Review to expand the body of the business plan by writing out more details for each section.  The details of your plan should include description of your products and services, your customers, your competitors, your operations, and your industry.  You can add charts and graphics to the business plan, once the core sections of the plan have been expanded.

When you get finished or at a good stopping point in completing the detailed plan sections, it is time to re-visit the numbers and then revamp the Business Review again.   Once each section of the business plan has “meat on it”, then you can change the title of the Business Review section to Executive Summary.  You are close to being ready to share with a selective few people who you know, love, and trust.

The Executive Summary goes at the front of the business plan, right behind the title page and contents page.  The financials go last.

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Tip #6 – Include your contact information on the title page and in the footer on every page of your plan.  Include page numbers on every page, except the title page.  Include the “date last revised” at the bottom of the Title page.  Be careful to research the company name, the domain name, email address, mailing address, colors, and type of logo, before finalizing.  This may save you money if you take a little time to identify the best name and other information, in order to maximize customer reach.  Consult with a business attorney to evaluate the optimal legal structure for what you have planned, before spending any money.  Consult with a CPA to discuss tax and licensing requirements, as well as options for bookkeeping and keeping business records organized, before spending any money.  Even though you are very excited about what you want to do, slow it down enough to decide on the best choices for you before spending too much money.  Then, on your mark, get set, go!

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Tip #7 -Don’t forget that the best plan is one that works for you, the business owner.  It is part of the learning curve.  That is, we practice what we do and develop a discipline to revisit the plan monthly, quarterly, annually.  The plan helps us do what we say and say what we do.  This is how the big companies have grown to be big; this is how you can do it, too.  Listen to the feedback that you receive from others, but stay focused on your dream and what you know will work well for you and your clients.  Also, be open to facts and numbers, sometimes a better way of doing things is revealed that was not part of your original plan.  Be objective, passionate, flexible, firm.

Start your business with a plan and then work your plan to make it work for you.  This will save you time and money, plus…have more fun!  Life’s too short not to give it your best, your all.

For more information on Creating a Top-Down Plan That Sticks and other business strategies, contact Nita Black at Info@NitaBlack.com or go to her website at www.NitaBlack.com.  You can also find Nita on Facebook, LinkedIn, and Google+.

Experience success!


NIta Black, CEO/Business Strategist
www.NitaBlack.com

“We provide business tools to help clients monetize their ideas.”

Nita Black - Business Strategist

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