Now we're going to look at your business and how it is going to make money. How do you think that you're going to configure your services, and your pricing, and your sales targets in order to run this business? Click to the Revenue Inputs tab on your sheet, and let me show you how this works. On this sheet, the areas in yellow, that's where you can enter numbers and the ones that don't have any formatting, don't change them, because there are formulas and they'll automatically calculate. First thing we're going to look at is the size of your market. We looked at this in a previous lesson and we must have done some research, so we would put in here. Let's see, there's 50,000 business owners in my community that might need a website, so in this section I would put 50,000. But if your product or service is different and your market is different, you would put a different number in here. In Year 1, how many customers do I think that I could actually get and convince to purchase a website from me, and how much would that website cost? If I think I actually could attract 24 clients and that would be two a month, that's going to automatically calculate. That would be a reasonable percentage of the market that I could reach out to, and my price could be $5,000 on average for a website. I think that could work out, and that would give me about 120,000 in revenue in the first year. In the second year, I'd like to do a little bit better. I think I could grow by about 20 percent a year in the second year, and my prices could remain at 5,000. I could grow 20 percent in the third year, and keep my prices the same and do a little bit better. I could grow 20 percent in the fourth year, keep my prices the same, do a little better. In the fifth year, I could grow again my 20 percent, and I could have this same price for my service, the website. Once you decide on all of that, you have the scenarios that we need in order to calculate the revenue part of our forecast. Now, let's move on to Expense Inputs. Click to the Expense Inputs tab. Again, if the cell is yellow, that means you can enter information there; if it's just a regular cell, those are formulas and they'll calculate automatically. The first thing you'll notice is this odd cell here that is not yellow, where did this come from? Well, this is carrying over from your personal budget. This was the target that you needed in order to meet your monthly personal expenses. This new paycheck is what you're aiming for and we're trying to balance the business budget to able to get you to that paycheck. But in a business, there's lots of other expenses to monitor and to manage, and you're going to have to spend money on things that you might not be anticipating. Let's come up with a reasonable number for those things, and make sure that we account for them in our budget. The first thing is you'll end up having to do some marketing. You may have some utilities that are extra because you're running a business. Maybe you need to upgrade your Internet or you need a better phone. You may need to get contractors, legal, and accounting support, and so you need a budget for that. You may need to have some software that supports your business, like your accounting software or your emails and your document management. You might need project management software and things. Those would go into this category. Thinking about this, well, if you're working from home you might not need to rent a place, but you might want to have an office or studio, and if so, then you could put in something here, for example. But for me, I work from home and so that becomes really easy, that category goes to zero. If you are the primary person who is working in your household and you need to carry the health care insurance instead of relying perhaps on a spouse or partner's health care insurance, then you'll need to budget for that. You'll need to also make sure that you're covered for life insurance that might have previously been provided from your job. As a freelancer, you need to make sure that your bills are covered and any debts are covered, if you incur debts in your business, as well as leaving something for your loved ones in the case that you die. You don't want to leave your loved ones in a lurch trying to wrap up your business affairs, and so having some life insurance will help with that. You want to continue to maximize your retirement investing, if you can. Remember your job probably gave you a retirement account and did some matching, so you don't want to fall behind in your planning for retirement. You want to make sure you budget for that. Well, you need to have a car insurance or fuel to actually travel to client sites or transport anything. Well, you'll need to have a budget for that. If you go to conferences, or you need to fly, or take a train to particular sites, you may have to have a budget for that. Of course, things like continuing education, taking courses like this in order to support your learning and growing as a professional, you want to have a budget for that. Then of course, you need to budget for taxes. Now, depending on where you live, your tax rates may be quite different. Make sure that you look up a good estimate for your national or federal state and local taxes. In the US, my accountant informs me that a sole proprietor tax is another 15.3 percent on top of this. But I'm going to in this scenario imagine that you've incorporated and you're just paying what we'll just use as an estimate here, the 30 percent on average for your taxes. But make sure you get this accurate. The next thing we'll do is put an assumption in this Growth Rate column, to say how much this expense will grow over the five years. We just put a flat number here that would apply a growth rate to each year. Let's say you want to increase your wages by 10 percent, but also that will require you to increase your marketing. You might have to account for, let's say a three percent increase in your utilities because of inflation, and you might need to continue to add some support to your business. Your Cloud services pricing may go up, your insurance cost may go up. Health care costs are generally rising more than general inflation. You're getting older, so your life insurance may go up. You may find that the retirement investing limit goes up, and so we just put some estimates in here for all of those things. The next thing that we'll do is pop over to the Forecast Detail page, because this is where a lot of the magic happens. In here you'll see that a beautiful model for your profit and loss statement or your income statement has been produced. You'll see that, in my case, I put in websites. So my product line is website and this is the revenue I'm forecasting because of the assumptions we made in the Revenue Inputs, and then you'll see that also the assumptions I put in the Expense Inputs are adding up here in this five-year summary. Then we get to this part where our gross margin is calculated, and that just says, "Hey, based on all of the units of the product that I'm producing, this is actually the money I get to keep to cover my other expenses and taxes." This is the percentage that results from decreasing my initial expenses that are used to build that product or service. Then all of your operating expenses get added up as well and pulled into the spreadsheet. You don't have to do anything here, just look at the numbers and see what's going on. Here we got to the scary part. You are not making enough money in your business to cover all of those expenses you're anticipating, so we're going to have to do some trimming. Let's go back and see what we can do to generate a profit at least in Year 1 or maybe by Year 2 of your business. Here are some scenarios that we could consider. Maybe we're going to have to actually sell more websites, so we change that from Year 1 and it flows all the way through. Let's see what happen to our forecast. Now are we making some money? Yes, we are. Look at that. We are able to make a little bit of a net margin at the end of the year if we sell that many websites, so that was the perfect number to pick. Can we do it? Let's go back and really think about this. Let's figure out how to not lose money in this business. Let's go back to our Revenue Inputs and see what we can do. First, maybe we can think about having more customers. Let's assume that we could get 36 customers. What would that do? Well, good news, that actually calculates to be making a small profit in each of the years. Good job, we could do it that way. But let's go back and think about it. Is doing three websites or three projects the way that you think about your business, is that reasonable to consider in order to actually make this happen? Do you think that you could find and close and produce three of your product or service at this particular price? If you think that's reasonable, then keep it there. But let's say that sounds like it's a stretch for you, so let's go back to 24 clients in a year and two a month, and see what else we could do. We could actually change our service price. Let's say our websites should be 7,500 instead, what does that do to our forecast summary? Well, as you can see, we can make money in five years that way too. Using this model, you'll be able to play around with some of your assumptions and make sure that you can make a profit in your business for the next five years.
