To quote the Maggie Smith character from Downton Abbey, “Oh goodie, let’s talk about money.”
What is the lesson for small business owners, independent consultants and professionals from the General Motors announcement to halt production at five factories in North America and cut more than 14,000 jobs? The restructuring is drawing swift criticism from elected officials. Me, I think GM is just getting the money side right and aligning resources around what the car buyers want: SUVs, trucks and driverless cars.
The lesson for those who run a business is you need to get the money side right if your business is to survive and thrive.
To help independent consultants, small service businesses and professionals get their money house in order, I recommend the 50/35/15 budget formula, which was invented by author Mark LeBlanc. This is a baseline formula that has worked for small businesses in the $100,000 to $2 million annual revenue range.
The formula advises solo business owners how to allocate net revenues after the cost of sales is subtracted from the gross revenues. The 50 translates to 50% for ODI (owner’s discretionary income), 35 means 35% for business development, and the 15 represents 15% for office administration expenses. This is your road map to expense allocation.
Now every business is unique. The perfect formula for you might end up to be 60/30/10 or 55/25/20. However, in the beginning until you get twelve months of benchmarks under your belt, the recommended course is to allocate 50/35/15.
Let’s begin the discussion with the 50% for the owner’s discretionary income. Business owners take compensation in many forms: a salary, a draw, health insurance, life insurance, disability insurance, automobile loan payment or lease, your SEP IRA or other retirement amount. Plus don’t forget taxes.
The 35% for business development covers such costs as advertising, direct mail, publicity, attending networking events, putting on seminars, publishing a book, maintaining a website, professional development, and other promotional activities that are new client contact strategies and tools. If you pay commissions or affiliate fees, this belongs here. You must invest time and resources if you want to grow your business.
The final 15% is for office administration. This would cover an actual or virtual assistant, office space, computers, software, tax and legal help, stationery, and the like. To grow in the sweet spot of $100,000 to $400,000 annual revenues, you are probably going to need some help. An assistant can free you up to focus on the necessary tasks of sales and marketing for your business, not to mention servicing clients.
If you have investors, you need to pay them. Personally, my formula is 50/25/10/15, with last 15 being used to pay dividends to investors.
Depending on your business model, you cannot ignore cost of sales. If your business model includes a direct cost to manufacture a product or a labor cost that you include to create the service you offer, that is called cost of sales (sometimes called COGS, or cost of goods sold).
For example, a business might look something like this. The monthly optimistic sales number for a graphic designer is $12,000 and the monthly cost of sales is $2,000 (subcontracting to a graphic artist). After the $2,000 is subtracted from the $12,000, the formula is applied to the remaining $10,000. The owner keeps 50%, or $5,000, for themselves as a monthly salary. Another 35%, or $3,500, is invested in business development. The remaining 15%, or $1,500, is spent on office admin, including rent for a studio, a virtual assistant and a part-time bookkeeper.
