If the work you do is something you’re passionate about then the business side of it can often take a back seat. I’ve worked with many owners of small businesses who work all the hours and are talented at what they do but don’t even know if their business is profitable. Being ignorant about the financial performance of your business is risky and many small businesses fail as a result.
There are many reasons people stick their head in the sand including:
- Fear and loathing of anything to do with “boring” business or finance
- Lack of knowledge and unsure where to get help
- Secretly know that the business isn’t making enough money but don’t want to give it up
There’s no reason why you can’t love your work AND be in control of the business side. You could start by getting to grips with whether your business is financially viable. It’s worth asking yourself why you want to run your business in the first place. What are your goals?
- Do you need the business to make you a certain amount of money each month?
- Do you just want to be your own boss?
- Do you want to fulfil a long held aspiration?
Whether or not money is your first priority, it can only be helpful to know how much money you’re likely to make – or lose! This will help you decide longer term, whether running this business is right for you. To help you get to grips with the maths, we’ll use the example of Jane who is returning to work and is considering launching a cake-making business …
1. Estimate a realistic monthly figure for the sales of your product or services
For Jane, the number of cakes she thinks will sell multiplied by the amount she will charge per cake.
12 celebration cakes per month @ £45
70 simple cakes per month @ £4
Total = £820
2.Work out as accurately as possible, how much it will cost you to sell those products
This includes not only the cost of the product itself but a proportion of other associated costs such as electricity, premises, equipment and marketing. For Jane this means the cost of all the cake ingredients plus kitchen equipment, packaging, delivery and a proportion of her household fuel bills.
Cake ingredients = £220
Additional costs – £75
3. Subtract the product costs from the sales figure
Jane’s figures are £820 – £295 = £525
4. Work out the number of hours of your time you will spend on your business
For Jane this is 4 hours per day = 20 hours per week = 80 hours per month
5. Calculate your hourly wage
To do this, divide your figure in 3) by the number of hours in 4)
Jane’s is £525 divided by 80 = £6.56 per hour which is around the minimum wage mark.
Seeing your figures in this way, may prompt other ideas about how you can earn more from your business. For example, if there is only one of you doing the work such as with Jane’s business, there may be ways of maximising your time. Jane could invest in a bigger oven and time-saving kitchen equipment in order to increase the number of cakes she produces in the same number of hours. Or, you may be happy enough earning a minimal amount in exchange for the added benefits of being your own boss and being able to fit your work around family commitments.
Whatever your take on it, knowing your figures means you can make informed decisions about the business you love.