One of the most challenging things about a start-up for the founder of the company, is it’s difficult to see the road ahead clearly. There are many moving parts to a new business, many distractions, many uncertainties. It’s sometimes hard to focus on the bigger planning issues, such as:
- How big can this young company truly become?
- How quickly (or slowly) should we grow to succeed?
- What are the milestones to watch for and the pitfalls to avoid?
A Road Map for Success
The goal of this article is to teach you how to build a financial plan for your business: a five-year predictive model that takes into account every dollar of revenue and every dollar of expense—month-by-month for the first five (or next five) years of a direct selling company’s life. It’s completely interactive and allows “what-if” scenarios. Change an assumption and the outcome changes as well.
This article will focus on the Income Statement. But, it’s simple to spin off a balance sheet and a cash flow schedule once the Income Statement is firing on all cylinders.
Constructing the Income Statement is not for the faint of heart. But, you can do it if you have a grasp of fundamental industry standards and can write formulas in Excel (or you have the help of someone who can).
Constructing the plan can be time consuming, but your reward is that you can see five years into the future. And, when you can focus on the long-term goal, you’re less likely to get distracted by all the sound and fury associated with the day-to-day management of the business. As an added benefit, you’ll probably make smarter expenditure decisions, because you’ll have a much better understanding of the economic impact of those decisions.
A financial plan should be comprised of three major components:
1. Salesforce dynamics
2. Revenue generation
3. Expense projection
Here is how you begin.
Step One: Assumptions
1. Open a new Excel workbook. Name the first worksheet, “Assumptions.”
2. Down the left-hand column, list all the assumptions you can think of for sales force dynamics. These should include recruiting, attrition, activity, and if you’re a party plan company, the number of parties per month per active consultant.
3. Across the top of the worksheet, make column headings for five years—month-by-month with annual totals.
4. Plug in your assumptions.
- Consider using the industry standards for recruiting and attrition that I suggested in my June 30, 2010 article, “Growing Your Business Organically – The Rule of 350.”
- If your company is a start-up, allow plenty of time for field recruiting to ramp up. The consultants need time to gain traction in the market.
- Assume that you will complement the recruiting efforts with corporate recruiting programs, at least for the first few months.
- Don’t forget to account for seasonal swings. Activity, for example, drops in the summer and peaks in the fourth quarter.
5. In similar fashion, create your assumptions for the other major Profit and Loss Statement (P&L) lines:
- Revenue – Remember to include all sources, including sales aids, renewal fees, and closeouts.
- COGS – This should decline as a percentage of gross revenue as volumes increase and sourcing options improve.
- Promotions and Discounts – This will include host awards, consumer promotions (if you believe in them), and kit-builder discounts.
- Selling Expenses – The big items here are consultant compensation, incentives, and annual conference. You can expect consultant compensation to increase as a percentage of revenue as the field organization matures. Fortunately, gross margin improves as COGS drops (above), providing an offset.
- Fulfillment Expense.
- Technology Expense.
- Customer Service (if outsourced).
- Administrative Expense.
Step Two: Expense Schedules
I know you’re antsy to get to the Income Statement—that’s the fun part. But, before beginning the Income Statement, you will need to build three supporting worksheets: Sales and Marketing Expense, Administrative Expense, and Catalog Cost. Build each of these in the same layout as the Assumptions and Income Statement.
1. Sales and Marketing Expense: The major expense items on this worksheet:
- Field Communications—Are you planning to go paperless, or will you need to budget for printing and postage?
- Annual Conference—Plug in your assumptions for what percentage of your salesforce will attend and how much you will spend per attendee.
- Incentives—Should include consultant trips and leader retreats.
- Recruiting—Any company-sponsored events. Typically, these would be limited to the early months of the company’s life.
- Training—Any company-sponsored events.
2. Administrative Expense
- The major expense on this schedule is the Human Resources plan. Down the left-hand column, list all the positions you’re likely to need. Make an assumption about when each of them will start, then plug in their monthly compensation, beginning on their start date. Don’t forget to include an allowance for benefits and taxes. Figure on 18%.
- Once your HR schedule is complete, you can build monthly assumptions for other general and administrative expenses. Don’t forget to provide for: