The holiday season is upon us, and the New Year is fast approaching. It’s tempting to leave any decisions around your small business until after the festivities have finished, but there are benefits in putting in some work towards your next year’s goals way before January.
Everyone has New Year’s resolutions, including small business owners like you. But why not take time before January 1st to evaluate your business costs for the upcoming year? Why wait until the cold reality of writing a different date digit on your payables to work out what your revenue goals should be?
Before the need to sing, “Auld Lang Syne,” take some time to work this three-step, bottom-up approach towards setting your revenue goals.
1) Determine your break-even amount.
In order to run your business, you have to pay yourself first: you need to give yourself a salary. Your salary is your business’s key expense. The salary should be what you need to live on (to include all personal obligations and family expenditures) plus a contingency amount. To do that, you need to determine what your personal expenses will be for the next year. One way is to review this year’s expenditures and potential increases for next year. What did you pay in medical costs? Did little Susie get braces? Will the interest rate on your mortgage go up or down? And just assume that you will have an overwhelming need to eat. These and other factors will determine your break-even amount.
2) Determine your hard costs and your soft costs.
The next step is to look at what you need to spend each month to keep the business afloat. These are your hard costs. They aren’t unlike personal expenses in that these are the known bills that need to get paid every month. How much do you pay in commercial space, employee salaries, and any internet infrastructure? These are just a few examples of hard costs. Before January comes around, you can review your business account statements to get a sense of how the next year will look, and adjust for increases (employee salaries, office rental space, et cetera).
Now let’s look at soft costs, which are any intangible expenses that you can foresee occurring given what you know about your business. Soft costs can discretely impact your business in the same financial manner as hard costs, and they pose a special threat as they can be tempting to dismiss altogether. Think of doing your food shopping while you’re hungry and despite the fact you have a shopping list, you buy a load of food to eat as soon as you get home. Those impulse items can be thought of as soft costs because those items bought were to satisfy an opportunity that presented itself (in this case, your hunger).
Opportunity cost is a major drain on small business owners because it usually requires the business owner’s personal attention, but, in hindsight, the time and effort could’ve been used more efficiently. If you work from home and clean your house during a fallow business period, you are expending effort and energy away from your enterprise when you could be chasing leads or enhancing your brand’s social media presence.
3) Set your minimum revenue goal.
Now that you understand your break-even point, construct your revenue goals. Make sure they are
SMART: specific, measurable, attainable, realistic, and time-sensitive.
For example, instead of having a revenue goal of, ‘make more money than last year,’ you can take your previous analysis to determine how much revenue over break-even you want to make per month, per quarter.
By appreciating your previous year’s personal expenses, as well as your business’s hard and soft costs, you can work up a baseline for the next year, and go into January confident that you will have a clean first-month-of-year running of your business. Certified Business Loans can help you fine-tune your revenue goals and planning. Our experts can work out the best options for your needs, and boost your business towards starting the New Year with a bang.