Today is a solo teaching episode where I introduce you to my Upside Down Business Budget.
What is covered in this episode:
- The surprising question that not many business owners know how to answer
- What is the Upside Down Business Budget and why it is so important to your business
- Why every business owner needs to know their sales and turnover targets
- Two business case studies that demonstrate the importance of doing the budget and examples of pitfalls and risks they faced without knowing their sales revenue targets
- The framework in completing the free Upside Down Business Budget worksheet:
- How to work out to work out exactly what you need for the lifestyle you want – time to get detailed!
- Working out your Return on Investment (ROI)
- Operating costs
- Tax considerations
- What to do once you have you have completed the worksheet
Links mentioned in the show:
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G’day, g’day. Welcome to the “Business Made Easy” podcast, where we make business easy. I’m your host, Jason Skinner and whatever you’re up to, I hope you’re doing well and business is pointing in the right direction for you and you’re kicking some goals.
I hope you’re kicking some goals and having some wins in your business because that’s what it’s all about. And not stressing out and, yeah. Business is designed to provide us with life and give us life, not take life from us and that’s something that we all need to remember from time to time.
So I hope you’re well and thanks so much for joining me. I do appreciate your time and for those of you that have been providing feedback over the coming, past weeks. Thank you for that, it’s really helpful and I’ve been noting it down and taking it on board. It really is important to me that I provide relevant content to business owners and people wanting to start businesses or grow their business. So, it really, that feedback is invaluable, so thank you so much for doing that.
If you’re just joining me, this is your first episode on the show, thank you for joining me. I hope you get some value out of it. As I said, my goal and purpose is to provide valuable content that a business owner can take away and implement, in their business in a practical fashion. And I’m going to have, I’ve got some great interviews coming up over the coming weeks.
But todays’ episode is a practical episode, it’s a bit of a teaching, learning episode. And I’m going to introduce you to a system, that I call the ‘upside down business budget’. And I’ll get into a bit about what that is in a minute. But I just wanted to share with you, just how that came about.
Because over the years, I’ve met with many, many businesses, of all different shapes and sizes. And I’ve helped so many of them. But one of the very first questions I ask when a new business owner comes to me, or I see a new business owner. I say “what sales figure, what turnover figure do we need to make, in your business to achieve your bottom line goals?” And it astounds me, to no end, how nobody knows the answer or very few people know the answer to that question. Usually when we hear, if I give you a bit of background.
Usually when we start out in business or people start out in business, they start out with a passionate idea. So they have an idea that they want to make bread, or they want to sell widgets. I always use widgets as a word but, widgets pretty well cover everything. A lot of widgets made out there.
Or they want to drive a tow truck or they want to, whatever it is that they want to do, in that business. But they very rarely know what income figure they need to generate in that business to achieve their goals. And that largely starts with the problem, that they don’t know, at the end of the day what they’re goals are. Clearly.
So when I say, “don’t know what their goals are, clearly”, what I mean is they don’t have a clearly identifiable bottom line goal that they are trying to achieve. They know how to do what they want to do and they’re passionate about doing what they want to do but they don’t. And to a large extent, they want, most people want the same things. They want a nice house, they want to be able to go on holidays; they want this.
But they don’t know, they haven’t quantified what that actually looks like, in real terms. Physically, what that looks like. And if you don’t do that as a starting point, if you don’t have that as your foundation, then what’s going to happen is you’re not, there’s no way in the world you’re going to know what sales figure you should be doing in your business, to achieve that bottom outcome.
And that’s why I developed over this, and I’m going to share this with you. It’s a freebie I’m putting in the show notes for you. And you’ll be able to get that by going to businessmadeeasypodcast.com\episode10 and if you write out the word episode in full, so it’s business made easy podcast dot com forward slash episode 10.
And if you go there, you’ll be able to download this freebie that I’m going to give you today. But that, this is why I’ve designed the, I guess it’s called the ‘upside down budget’. It flips everything on its head so that at the end of the day, what we end up at the bottom is the sales figure that we need to strive for or achieve, in our business.
And I’m going to go through a little, a couple of stories for you that explain exactly why this system is so important. And exactly why every business owner really should have something like this, or at least know exactly how to, what sales figure or turnover figure that they’re looking for in their business.
Now, I’ve changed the names of these stories, so they are real stories, they are true however I’ve changed the name to, out of confidentiality and I want to protect those people that have experienced this, but certainly the stories and situations are true.
The first one I’m going to talk about is Jan and Terry and Jan and Terry started a retail fruit business. They had the idea, Terry had been in fruit for a lot of years and knew the fruit industry. So he was very passionate, he knew how it worked and knew how the markets etcetera worked and where to buy and source the fruit and whatnot.
And over talking, Jan and Terry decided that they would be able to start a fruit business. Because after all, terry knows how to buy the fruit etcetera and Jan was, is a very personable person. She would be great at customer service and could work the register and that sort of thing.
So they had the idea to start this retail fruit business, so they do what most people do first, they start looking at logos and colours and dreaming how the shop’s going to look and feel and all those things. You know, what it’s going to be like when a customer comes in and you know, how good the quality of their fruit is going to be. All those things that a passionate business owner, starting out really would look for.
And once they had all that down pat, they started looking around for locations where it would be a great place to have this, this shop and how it was all going to look as well. And identifying a place, to cut the story short, they identified a place and negotiated a lease and the lease they negotiated was a five year lease. So they were signing up, with this fruit shop for five years.
They felt confident that it was going to be a success because after all, everyone eats fruit and Terry knows fruit, so and Jan’s good at selling fruit. So it was all going to work and the marketplace was, going to be fine. They engaged shop fitters, they had refrigeration units and all sorts of stuff that they needed ordered. Everything was done, the lease was in place. They were fully committed.
And they had a fair bit of equity in their house, at the time, so they’d paid a lot of money off their home and their home loan was down and the value of their property was up. So they could access some of that and the bank were happy to do that because the bank has the security of their house.
And they were going to employ staff to help them out because it was going to be a decent size business. But their accountant at the time, had really not done any planning with them and certainly hadn’t steered them in the right direction in terms of pre-planning. But that aside, they’d fully committed and when they finally, well actually they came to me for some help on another matter.
But when I asked them, “what level of sales does this business need to make to achieve your goals?” The look on their face was quite, quite pale. They didn’t know. And I, which is okay, because a lot of people don’t sit down and identify this because it all seems too hard sometimes. And sometimes it’s just a lack of interest, in terms of wanting to do it.
But they just didn’t know and then when I asked them what their goals were, they were really, really cloudy as well. They knew they wanted to have a fruit business, they knew it was going to be seven days a week and they knew they could employ some staff to do it.
But if you look at this situation, Jan and Terry have committed so much to running this business and setting this business up. They’ve put their home at risk, at commercial risk. They’ve signed up for a five year lease. Yet they don’t know how much money this business has to actually make, to support their lifestyle or what that ultimate lifestyle is even going to look like.
So, that’s a real case in point of what I’m talking about today and why I developed this system called the ‘upside down budget’ because I put together a way that if you follow the step by step template, you can really just, you can really just, really come up with this figure. You know, using the 80/20 principle quite accurately, it certainly gives you a lot more goal to focus on then just having nothing.
So, Jan and Terry, we went through this process that we’re going to talk about today. The other one I want to talk about, the other situation and case study I want to talk about is Richard. And again, the name has been changed to protect the innocent. But Richard, he was in a totally different situation. He had to take a redundancy, or decided to take a redundancy from his banking position, his long term banking position. So he’d been working, he’d worked his way up the ladder in the banking system and they were cutting staff and he decided to take the redundancy offered to him.
So with that money, he was able to pay out his house and but Richard was sort of an older guy and he didn’t, he was a bit concerned about getting reemployed, I guess, at his age. So and with his skilled set, so he sort of, after having a bit of a holiday and a bit of a break. Paying the house off, he had a little bit of money left over and decided to venture into the online space.
And over in the online space, he’d done his research in terms of what sort of products he could sell and where he could source the products etcetera and how it could all work. And so he stumbled across an LED lighting manufacturer in China. And he was going to, his business model was basically to have these LED lights manufactured in China and then he was going to ship them directly to Amazon to Amazon FBA. Which is Fulfillment By Amazon, so FBA stands for Fulfillment By Amazon.
And basically Amazon were going to be his warehouse and his distributor and they were going to look after all his customer returns and everything like that. So he’d really done a lot of work around this space and he worked out that there was a market for LEDs. People putting LEDs in their homes, they were USA compliant, US compliant, so they would work. It was a great business model for him because effectively it’s something he could do himself and he could basically still be engaged and employed and whatnot.
So he was very excited about it but until he came and saw me, but when I sat down with Richard, I said to him, “Richard, this is fantastic, you’ve clearly done all your research etcetera but again same question, you’re going to invest, you’ve got your house paid off, which is great. But rates still need to be paid and you’ve still got bills coming in and you’ve still got lifestyle to maintain. You’ve had a great lifestyle up till now. How do oyou want to maintain, how are you going, is this business going to be enough to support that lifestyle? What level of sales, the magical question, what level of sales have we got to make to support your lifestyle?”
Now again, blank face, looked at me and goes “I didn’t think of that, I just thought that these would sell and it’ll all be okay.”
Now call me a conservative accountant or business advisor, whatever you want to do. And my wife tells me all the time that I take the fun out of things, but here is a case in point. If Richard firstly identified exactly the level of income that he needs after tax, to support his lifestyle, no matter where you’re living, whatever you’re doing. If you clearly identify your goals and what you need to fund those goals, so we reverse engineer it.
Now, so let’s, let me take you through the steps and you’ll need to work through the worksheet. I have provided a free worksheet over on the podcast website, so you can get it there, remember at businessmadeeasypodcast.com\episode10 so I’m just repeating that because if I lose you in explaining this. You may want to go over and download that worksheet and you can work through this again, you may want to replay it.
Particularly if you’re at the gym or if you’re out exercising or something at the moment, the last thing you’re going to want to do is go through numbers. So, I’ll go through it quite clearly, exactly what I told Jan and Terry and exactly what I told Richard as well and how we helped them to get clear about what it is that they needed to do, to really get their business pointing in the right direction.
So, the first thing we did was we sat down and we had a whiteboard session, but this can be done on any piece of paper. But sat down and worked out exactly what their goals look like. Now that means, what do, do we want an overseas holiday once a year? Do we want to buy an investment property? Do we want a new car in two or three years’ time?
And we put numbers next to them, what do they look like in terms of timeframe and dollar value. And we basically got very, very clear from the outset about that. Because that, at the end of the day, you can sit on the, I have this saying, you can sit on the beach and go broke. You can sit on the beach, do absolutely nothing and still go broke or you can go and commit to all of this stuff in business, put all this time and money and stress into business and still go broke.
So, I don’t want to do that and I don’t want that for you. So, what we need to do is make sure that the business or the risk that we’re going to go in to and commit to is going to make sure that it supports our lifestyle. So, we worked out exactly what it is that their lifestyle needed in terms of dollar value and broke it down to an annual amount.
So that was very, very, they had to be very clear. That has to be the first thing because you don’t know what you’re needing. The next thing we did then is worked out how much money we have invested in the business. Particularly in Jan and Terry’s case but also Richard because Jan and Terry are borrowing money from the bank, off their mortgage, so that, I think the interest rate at the time was about five and a half percent on the money that they’d borrowed to put in. So, really whatever that money is, the business needs to be able to repay that back as well. So we worked out exactly what that amount is.
Richard had some cash and he was investing that in his, so he basically needed a return on that money. Because he could actually get that same amount of money and go and put it in a term deposit or a security with the bank and get a return on it. So we worked out exactly what looked like as well. And we added the two together, so what do we need for our goals? What do we need to repay back the money we’re putting back into the business?
Okay so that’s what we call our capital we’re putting in, and that’s the total after tax profit minimum that we need in the business. So that’s what we worked on from there. We then worked out, well what before tax, what does that amount of money look like before tax? And again this is on the worksheet but what amount of money?
So let’s say, for instance, I’ll just use a round figure. Let’s say we decided that, for example, we need $70,000 a year after tax to pay this money. But the tax rate is, I’ll just pick a figure, we’ll say 30 percent. So if we’ve got, if we need $70,000 but we’ve got to pay $30,000 tax we really need $100,000 before tax.
So, I hope that makes sense we’re working out what the before tax figure is now. And it’ll be different depending on your country or region that you’re in. But this worksheet will work anywhere, so again it’s clear in the worksheet.
Once we’ve got our before tax figure, we then want to work backwards and say “okay, what costs are we going to have on the business?” So once we’ve identified all the relevant costs, what’s it cost to buy our goods, what’s it cost to keep, pay the lease, what’s it cost, all our costs? We have to do a fairly thorough budget here and past information will help you with this as well.
So if you’ve got past financials, if you’re an existing business you can go back and look at those and that’ll give you a guide as well with those. But that’s, again clear in the worksheet. So once you’ve worked out those costs, you add that to our before tax money, our $100,000.
So, let’s just say, for arguments sake, that our cost to run our business are $200,000. So, we need $100,000 before tax, we need $200,000 worth of sales to pay for our costs. So that’s $300,000, 100 plus the 200, gives us 300. So we need to make sales of $300,000 in order to have a $70,000 after tax profit, to service our goals and meet our needs.
So, do you see how that works? We’ve reversed it, we started with what we need to drop out of the bottom of our business and we’ve worked backwards as to how, what our gross turnover is. Now I hope I’ve explained that. Okay, it’s very difficult to explain numbers and I might actually do a bit of a YouTube tutorial video on this too to work through the worksheet with you.
If that’s of interest, just drop me a line and I’ll certainly to work to help you with doing that. But it’s very, very important that we start with what our goals are, work back from there, what money we need to service those goals, what money we need to pay our tax, what money we need to pay our overheads and the resulting figure, all added up will be the sales figure. Minimum sales figure that we need to make in our business to at least service our needs.
Now if we can make more than that, that’s great. But the main thing is, if you’re making less than that, then we’ve got a problem because obviously we’re not meeting all out commitments that we need to make.
The other thing that I want to take away from that, is when we know that figure, we know, we then have one target to work to. We can actually now work towards attacking that figure and doing all the things necessary. We can adjust our marketing, we can monitor it and test it and that’s the benefit of using this method, the reverse budget method. Is that when you come up with a sales figure that you need to make in your business, whether it’s online, off or physical business, you know where you have to head. And you know what you’ve gotta do, so you can out your marketing strategies etcetera into place.
We can monitor the progress and there are that many unknowns in business, I’m sure you’ll agree. There’s that many unknowns in business that this gives you a framework and an easy method to engineer the sales figure that you need to make to have profit and success in your business.
And that’s the benefit of implementing this system because it gives you clear, identifiable figures to work to and you can monitor and track it. Now from there, we can use our accounting system and we can monitor it from month to month. We can break it down, we can look at it and we can really see what resources we need to achieve that figure.
For instance, in my example there where I said, “okay, we need $300,000 worth of sales to make the profit that we’re looking for.” Well we mightn’t have enough customers to reach that $300,000. So what we need to do in that instance, is actually say “well, what’s our gap? What’s our shortfall? We might only have $250,000 worth of sales, what strategies are we going to put in place to make sure we do get to that $300,000?”
But I hope you can see that because $300,000 is the number we need, it doesn’t mean that we just rest and go “we only came in at $250,000,” we really need to work towards and work out what we’re going to do to do that. So that’s where your marketing strategies etcetera come in and identifying the resources that you need to get you to that figure.
So the thing I’m talking about today, mustn’t be confused with marketing. It really is just a framework to help you, step by step go through and identify what the sales, what the magic sales figure is in your business and that’s, I guess, the point of the exercise there.
But, I think if you get the template, if you go and download the template from the website. Again it’s businessmadeeasypodcast.com\episode10 and you can download it, work through it. It’s just a fillable PDF, if you need a hand with it, by all means drop me a line and I’m more than happy to answer any questions that you have on it. Because I do know that when you do get in to talking about numbers and those sorts of things, you can lose people. So, I get that.
Alrighty, so I hope that helps. It’s my ‘upside down budget’. I want you to certainly go and grab a copy of it, if you think it will be of help for you. And again, if you’ve got any questions, you can always drop me a line. So, thank you.
That’s all I wanted to talk about today, I hope you’re well and I hope you got some value out of that. Again, if you’ve got any questions in business, please go over to the businessmadeeasypodcast.com website.
You can record your question there, I’d love to hear from you. People who have their question answered on the show, get a free too easy t-shirt that we’ll send out to you. And my team will make sure you get that in the mail, they’re a great t-shirt. I love wearing mine, I’m wearing it all the time. And yeah, so go to businessmadeeasypodcast.com and you can record your question there.
I’ll get that in a voice mail and I’ll answer that on the show for you and make sure that we get the answers that you need from there.
Well that’s all from me, again good luck in business this week. I hope you kick some goals and everything points in the right direction for you. And I might hand over to Mia to take us out, till next week.
To your success, bye.