My Next Job 3
My New Company
We have explored together the "who" for the previous two hubs regarding our next company. We need to consider now the "what." What kind of company are we going to be building - service, supply/distribution/logistics, manufacturing? And in what industry will we be concentrating? Of course, along with the "what" we can incorporate the "why" because that is the driver to determine if it will be viable.
In each of our previous discussions, the completing of a business plan is essential. This becomes the guide; the road map to success. If we can make a few assumptions to keep this as generic as possible we can move forward. These assumptions are that when we put together our plan of action within the business plan and had it reviewed by other competent businessmen and they agree there is reason to believe this could succeed; we can move to the next step. What we are saying here is that on review, the financials make sense. We are saying that the review of the market is reasonable and accurate. The plan shows reasonable and best case scenarios of costs of production, rent or purchase of space and equipment, transportation costs, supply costs and risks of supply shortages, market change potential, life cycle of the product or service, employment costs, legal fees and taxes, insurance and liability considerations; all of these have been explored, considered and tuned to make sense as a business.
Capital makes the difference.
The good part of all the planning is that by doing so we end up with knowledge to make good decisions from. If we have put in good information, we should expect to get out good information as well. With that good information we will know how much capital we will need to get the venture started. For those of you who have never started or run a business, this is a critical discussion. You may be betting the farm that this venture will succeed. That is you have decided to risk the mortgage on your home or empty your 401k or use your inheritance to move forward. Is it enough? Your business plan may say you need $10,000 to do what you expect to do. A good rule of thumb is multiply that times three if you are totally new to the process. 2.5 if you have pretty good experience but no business experience, and 2 if you have an MBA. Rarely does a new venture expose all of the potential costs upon initial review. Even a solid MBA may let a little slip past without missing a few expenses.
But here is the good news too. I have spoken with a number of individuals that surprise me with their lack of understanding as to how much it costs in cash to start and run a business. They also miss how much money they will make by large percentages. Spending a moment to walk through some of this paints a pretty good picture.
Let's say for example we are going to have 3 employees with an average income of $50,000 each. $150,000 payroll expense, right? Well, not exactly - particularly if you are going to have any benefits, transportation costs, office expenses, phones, internet, and on and on. Add at least 1/3 again to the employee gross income and we'll be closer to total dollars we need to budget. $200,000 might get us there. So how are we going to get $200,000 a year?
If we manufacture, we hope we have a contract that we know what our cost of goods sold are and our cost to manufacture are and now our cost of employees are - plus the distribution cost (either through distributors or through our own distribution). Our contract tells us we will sell 500,000 units at $1 each or $500,000. If our COGS and Distribution Costs are $150,000 and we allow $200,000 for personnel costs when we have a gross profit of $500,000 less $350,000 is $150,000. Here we have Earnings Before Interest Taxes Depreciation and Amortization, EBITDA. Net income with interest, taxes, depreciation and amortization expense added back. It is a way to compare your plan to publicly traded companies in the same industry and market to see if you are even close to realization.
For a logistics company the expenses are more based to the office. You typically may not own the trucks or other mode of transportation you are coordinating shipment of products on or in. If you do own or lease these items, they are just assets with depreciation associated. It may give you a sense of security and control - but it can be a weight - an unnecessary weight on the neck of profitability.
Similarly service companies may not have a large asset base to consider on that side of the balance sheet, but they may have higher insurance or other risk factors that are significant enough that some part of the income is set aside to cover. Internet companies used to have their own servers and buildings to house them as well as people staffed to maintain them. Today it is more likely to lease the space on a super server with a secondary or tertiary back-up in the case of a misfire.
Everything we have done until now has been on paper. Like building a house, changes or improvements done on paper are a lot less costly and a lot more doable. Working through the process from start to finish is how you make this new development, new company, succeed beyond your wildest dreams.
We'll get more specific on building our next job from the dust around us in the next hub. Until then, please consider what is going on around you. Are you planning a solid back door for yourself if something happens beyond your control?