I bet you're wondering what's Runway 3, we're about to design your business finances to support your life. Now that you know what you need to take care of your personal needs today and tomorrow, you can design a business that meets those needs and more. Your first responsibility is to hit the milestone of taking care of yourself and your family within this business. Many entrepreneurs think that if they charge $10,000 for a project, they get to keep $10,000 from that project and maybe they worked with consultants before and had a grudge about how much they charged. But now we're going to dive into how this actually works when you're in a freelancing business. New entrepreneurs are shocked when we talk about setting aside about 50 percent of their sales to cover taxes, benefits, retirements, business expenses. You see, entrepreneurs are business owners and they need to cover a lot of expenses that an employee doesn't even have to think about. This requires careful planning. Most entrepreneurs avoid planning and numbers, they rarely take the time to calculate how many customers they need and when, their average price per sale, their average cost per sale, how much they need to pay for expenses and salaries, how much they want to be able to take out to cover their personal needs like a salary or profit, how much they need to invest in their business to keep it innovative. Let's reverse engineer the budget process. We're going to start with what you need and work backwards. It's very difficult to predict what your Year 1 sales will be exactly. However, you can calculate what you need them to be and work backwards to see if the goals and assumptions are reasonable and to set frequent targets for yourself. Let's back into that business budget. You'll need to find these numbers. Your personal need for profit and salary per year as the business owner, this number will be covering your fixed costs for the year for your business, including rent, insurance, website, accountant, telephone, software, all of that stuff. Say that's $20,000. Maybe you have a service or product that requires you to keep some inventory, you need to spend about five dollars0,000 on that. Then you might have a salary for somebody who's going to help you out part-time and maybe that's $30,000, and average sales price per unit for your product might be $25 and the cost of goods sold for that unit might be five dollars. We're going to calculate a contribution ratio. That's the sales price minus the purchase price times 100 divided by the sales price and in this case it's 80 percent. Eighty percent of what you sold, you actually got to use to pay for those other expenses. When you have to come up with the five figures, you're able to calculate turnover and variable costs by using simple mathematical formulas. First, you calculate the gross margin or contribution ratio. We have that $25 item that we sold, it costs us five dollars to produce and deliver it and then we're going to do this calculation and we're going to end up with that 80 percent number. That's the gross margin or contribution ratio. Then you're going to look at how many of those things do you actually need to sell in order to make your salary, profit, and other targets. That's your unit sales targets, think about how many units you have to sell of that $25 item to actually get to your goals. Those scenarios will help you take home $100,000 if you figure that out properly. Let's come up with this scenario that would allow you to take home $100,000. If your other expenses added up to $100,000 in your business, that would mean that you have to net $200,000 from your sales and at that contribution margin, we would need to sell $250,000 worth of sales and then we would take that and we'd say, from those $250,000 of sales, how many actual units would we have to sell at $25 a unit? That's 10,000 units annually. Which turns out to be about 200 sales per week. You have to figure, is it reasonable for me to be able to produce and sell 200 units of this product in order to make my goals. If that sounds outrageous and there's no way you could ever do it, then maybe this isn't the right item or price to actually go forward with in order to reach your financial goals. After trying to figure that out, are you thinking about repressing your item or maybe changing up what kind of product or service you're going to deliver? Maybe you need to move upmarket and sell something that's a little bit more pricey or find a different distribution arm tip. Or maybe you need to find another distribution channel so that you can sell more units. What strategies can you put in place to automate your sales funnel, and guarantee these sales? How can you provide repeat value over time? Maybe sell once, and charge monthly or annually so that you're actually selling 12 units to one customer. Then you have to be willing to adjust. If you don't find these assumptions to be reasonable for your Year 1 plan, you must rework your business plan or you must easen into freelancing at a different pace. You need to find ways to increase your sales through increasing your value, increasing your frequency of selling through, for example, subscriptions, or maybe lowering your fixed in variable business expenses. Don't go and buy all the fancy equipment right away. As a freelancer, you need to be able to adjust your finances according to your changing needs. If you don't find these assumptions reasonable for Year 1, just rework your business plan. Find ways to increase your sales, increase the frequency of your sales, or maybe sell to the same customer multiple times. Maybe lower your fixed in variable business expenses. Don't go out, and buy all the latest equipment right away. You can increase your price per sale or reduce your cost of goods sold, or some combination of the two, and then you'll get back on track financially. Let's take a gut check. If this idea of managing your finances both scares and thrills you, that's totally normal. It takes a lot to get a business off the ground, and to get that right combination of price, and costs, and forecasting just right. If it terrifies you, and makes you anxious, and ill, you may need to find another way to make a living, and provide you with the stability you crave, because this is a discipline that every freelancer needs to develop. Your business idea could be a great side hustle, but maybe not a full-time income replacement option until you really get a hang of this, and gain more experience around sales and financial management. Let's review your three-runway goals. You need to save about six months of personal today needs to make sure that you can cover your financial obligations when you become a full-time freelancer. I recommend that you invest about 15 percent of your take-home pay in the market so that you don't have to pause to worry about your finances in the future while you're building your business. You need to save some money to cover your business budget while you ramp up, you're going to invest in certain things in your business right up front that are really important to get your business off the ground, and you need to have that money in advance of starting your business. You should keep a reserve of 3-6 months of business expenses so that you can keep replenishing it from sales, and never run out of money. You need to get into the habit of relentlessly reviewing your numbers, at least monthly. Look and see if you're falling below this reserve level. If you are, it's time to get serious about adjusting your business, lower your costs, sell more, change it up, pivot to improve the business. Maybe even sell the business or stop and close the business. You just don't want it to be impacting your personal livelihood. Unfortunately, many businesses fail because they run out of money or handle it badly. The most common reasons businesses fail because of this are, not enough capital, poor collections practices, inventory management issues, over-investment in assets, poor credit management, personal misuse of business funds, or unplanned or unmanaged burst of growth. I'd like to share some good financial management habits with you. Please resist the temptation to work for free. Do not barter for products or services. These are really tempting ways to build up a reputation, but we'll keep you from taking on paid work, and will impact your view of your worth. Save every receipt, your accountant will thank you. Have a bookkeeper, set up your books properly, and teach you how to classify your revenue and expenses. Keep your accounts connected to your accounting system, and reconciled, waiting to do this at the end of the quarter or the end of the year will not be fun, it'll take you days. Create a budget every month, and review your actual performance against it. Scheduled payments so that you don't forget them. Keep a reserve, and if you tap into it, repay it asap. Don't spend money, you know you'll need for taxes or other reasons. Do not jump into loans you don't understand or that put your personal finances at risk without careful consideration. Gaining experience in managing your business finances will take time, but will ultimately make you way more successful as a freelancer.
