In any small business, there are THREE essential tasks necessary for keeping your “numbers” on track: Tracking Your Income, Planning Budgets and Future Income, and Pricing to be sure you’re Profitable.
Yesterday, in Part I, I discussed Tracking Your Income and Client Info. Today we dive into Planning, and tomorrow Pricing.
Fortunately, as mentioned yesterday, great programs already exist that make tracking simple. (Such as Quickbooks + ShootQ). Plus, we have bookkeepers and accountants to help with the tracking part. Planning can be complicated, pricing even more so. That’s why we go in this order.
First of all, why is it important to plan? Planning Budgets and Future Income is simply part of any good business strategy. It’s deciding where you want to go, and mapping out how you’re going to get there. Specifically. In dollars and cents.
In business they call this creating pro forma financial statements. It’s a way to project your income, expenses, and cash flow before you actually put these things into place, spend, or make a dime. Investors require pro forma statements so that they can understand a company’s financial position and strategy before deciding to invest. By looking at the numbers in advance, you can see potential road bumps and cash flow issues before they happen. You can determine if a new product or service is worth your while, before you start. If something is not profitable, you know this in advance, before you dig your business into a grave.
So how do you plan? What is there to plan? Planning is as simple as common sense, and as complicated as years of entrepreneurship finance courses. I’ve spent the past five years teaching this information to other creative entrepreneurs, so by now we’ve simplified the process as much as possible. Here’s how it works:
1. Figure out how much salary you want/need to make. Pull a number out of a hat or do it the smart way and figure out a Personal Salary Budget. You need to include income tax as part of this equation. For instance, if you want to make $50,000 take-home pay, you need an annual salary of closer to $70,000 to cover taxes you owe to the IRS.
2. Make budgets for your business expenses that are a bit more complicated. Such as an advertising and marketing budget, and a budget for assets you wish to purchase.
3. Create a General Expense Budget (this includes the #s you came up with in #1 and #2)
4. Determine what your Cost of Sales (COS) percent is. You’ll need this number in order for #5.
5. Run the Break-Even Analysis. You need to know everything in #1-4 to do this. It’s a simple equation. General Expenses + Assets divided by (100 minus COS%). The answer is what your Gross Sales should be for that year. Gross Sales is the total amount you bring in sales from clients before expenses, discounts, or anything else is deducted. Now you have a precise Sales Goal for how much money you need to make that year.
6. Now that you know your Sales Goal (#5) you have to figure out how to make that money. This is where you forecast sessions and sales. You break it down by how many of what type of products and services sold at what price. So in a super-simple example: if your sales goal is 200,000 you can shoot 20 weddings at 10,000 each. You know your salary and all expenses are covered at this point. Anything over 200,000 is extra cash for you and the business.
7. The Income and Expense statement wraps it all together nicely. It tells a story of your income and expenses and will clue you into cash flow issues before they happen. It’s a nice overall picture of what you can expect if you follow your budgets and go after your sales goals. You can check your ratios against industry averages to see if you’re in line, or spending way too much in one category or another.
So that’s Planning for Profit 101. I know many investors and entrepreneurs who care less about seeing an in-depth business plan; they put a majority of their focus on seeing pro forma financial statements. This is the Most Important Part.
Of course, they spend years teaching this in entrepreneurship and business management courses in top colleges across the US and abroad. It’s not something that is easy to understand and do overnight. If you’ve tracked your numbers in the past, the planning part gets a lot easier though. A single article nor blog post cannot fully explain what there is to know about managerial accounting and finance in small business. Reading numbers is an art of sorts. Taking the time to plan is a discipline. A discipline you should practice over and over an over again. Soon you too will understand how to manipulate and tweak the numbers, tighten the budgets, expand the sales, and read the numbers.
So what about tools to help you plan? Successware has an excellent tool built in that helps you create budgets and sales predictions for your business. Many programs like Quickbooks have the same tools built in. You can even punch your numbers into Quickbooks once you have them figured out and compare your current information (tracking) with the numbers you predicted (planning). The only problem is that they do not include a way to figure out your personal salary budget, nor are they all-comprehensive in doing every step listed above. They include a few of the steps, but not everything. Don’t get me wrong, you do not need a tool. Pencil and paper work great, as does doing it in excel.
In 2006 we created our own excel spreadsheet (Profit Center Financial Planner) to aid other studios through the process and make things easier. It’s included with the Profit Center DVDs. These DVDs cover Tracking, Planning, and Pricing in much further detail and also go over many other business basics. The Profit Center Financial Planner covered almost all the steps listed above. After four years of refinement and teaching what in a few days will be 20 Photo Business Boot Camps, we’ve developed version 2.0: the Number Cruncher.
The Number Cruncher is a geeky Excel worksheet that will help you do all of the steps listed above. You watch me go through my OWN numbers with this tool, and you can punch in your own numbers along the way. What you get is a very clear picture of your finances and you can start making wise choices based on cold hard fact, not just a hunch you have. You can see if things are going to be profitable before you release your new pricing. You make sure to lower expenses if they are too high, or get that marketing campaign into effect this year if you need to up your sales. It’s knowing whether you can afford a studio space, or if it’s okay for you to quit your day job. That’s what planning does for you. And if you’re lucky enough to have potential investors, these are the documents they will want to see.
The planning process can be tons of FUN when you get the hang of it. At a seminar we taught in Cabo in 2007 one photographer came with her husband, who wanted to learn the planning part. She didn’t want anything to do with it. The day after the planning lesson, she returned to class and her husband proclaimed “I don’t even recognize this woman – she’s been up all night crunching numbers and giddy over this stuff!” She’s just one example of hundreds who felt this change of heart over practicing the number-crunching.
It really is life-and-business changing when you learn to manage you personal and business finances the right way and have a plan of attack. Don’t take my word for it though, as the hundreds of studio owners who have been through the process!
Since now is the PERFECT time to do your 2010 planning, we are debuting the Number Cruncher digital download – available for the first time a la carte (without the Profit Center DVD)!
For all of my Profit Center DVD owners, simply log into the Photo Biz Boot Camp Forum and you can access the Number Cruncher and Demo video links there. Same goes for Boot Camp folks!
If you’d like to get the Number Cruncher a la carte, CLICK HERE FOR MORE INFO.
That wraps up part II of Tracking, Planning, and Pricing. Tomorrow we touch on the complexity of pricing. If you have any questions or ideas please comment below and we can continue this conversation.