Clients are often surprised when I ask them this question. It is the last thing they've thought of. They have budgeted for a website, business cards and even stock, but have forgotten to plan for their living costs.
They get caught up in the excitement of starting a new business and assume that it will automatically pay the bills. The reality is that 70% of startups fail within 18 months - but there is something that you can do to improve your chances of success.
Spending time developing a business plan improves your chances of success and is the key to ensuring that you dont work yourself into debt. I often meet people who have great ideas, but struggling businesses. They have dismissed the need to plan; the common refrain from those clients is I already knew what I needed to do, so I didnt think I needed to waste time on a business plan.
Sadly without a business plan they lost focus and got caught up with working in their business and not working on their business. Consequently, due to the lack of a clear business strategy their business simply drifted, struggling to meet its financial obligations, let alone pay their househod bills.
A good business plan will have a financial plan in the form of a Cashflow Forecast and a Personal Survival Budget. A Personal Survival Budget will give you a true picture of how much money your startup needs to make, if your are going to earn a real living from it. A business plan that doesnt have a Personal Survival Budget can result in you running a business that only generates enough income to covers it own costs, but like a hobby, it is not economically viable to sustain your personal financial needs.
Putting together your own Personal Survival Budget is not as daunting as it may sound - its fairly straightforward. However the results can be a little scary.
First you need to work out your entire monthly outgoings. This includes things like your rent /mortgage, utility bills, council tax and the amount you spend on groceries. Quite often people forget to include things like school dinners, insurance policies, nights out, dry cleaning, and the trip to the hairdressers, but it all adds up.
Secondly, you need to work out all of your non-business related income. This should include income from savings, your partners income, and other things like child benefit.
Finally you need to do a simple calculation: you subtract your income from your outgoings (your outgoings minus your income). The shortfall tells you the amount of extra income your business needs to make to pay your bills, pay for your pension, or just pay for luxuries.
Once you have developed your Personal Survival Budget you can establish your businesss financial goals. In that your business plan will set out how many sales that you need to achieve each week, month or quarter to generate enough income. Once you have set your sales targets, you can devise a marketing plan that will identify the tactics and activities you need to carryout to meet these sales targets. So to guard against sleepless nights wondering if you have enough money to pay your rent or mortgage, spend sometime developing a business plan, before you start up your business.
by Vanessa Guthrie, MSc, Ba(Hons), PRINCE2
Mighten Business Expert: an Expert in business planning for startups and small businesses for 20 years.
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