The key to growing your business successfully is to implement a plan that will cover your expenses in the first 12 months – even in the event of zero sales. They say that turnover is vanity, profit is sanity but cash flow is reality. Many profitable businesses go bankrupt as a result of weak cash flow. Establishing a solid cash reserve will provide you with the necessary peace of mind to grow your business and the time required to grow your client base.
Establish your cash requirements for starting your business
When you start ascertaining your cash needs, never underestimate the costs. Bear in mind that they can increase as you expand. Your undue focus on the big picture can increase your propensity to overlook important expenses.
As mentioned, one of the common reasons for start-up failure is cash flow constraints. Some entrepreneurs base their start-up cost forecasts on unrealistic objectives and assumptions. They assume substantial sales and apply the money generated from these sales to running costs. If the sales do not materialize or are less robust than initially predicted, failure ensues. Without the advantage of experience and realistic financial projections, it is easy for you to overrate your new business’s revenues and misjudge costs.
There are scores of costs involved in launching your business. Below I have briefly outlined some of the key areas that you may need to consider.
Establishing a trading base is the first step that most companies take. The type of space, however, varies significantly. To construct a realistic cost projection, you should consider the type, size, and location that you require. Will you be renting or purchasing; what level of shopfitting will be needed etc?
Do not assume the numbers. Get quotations for all aspects of your office requirements and ensure that the amounts you place into your business plan are real.
Furniture and office automation:
When you buy or hire an office, you’ll be required to furnish it with desks, chairs, filing cabinets, computers and printers. As an MLM business, you will also require training equipment such as whiteboards, data projectors, work tables and chairs. You may also require a reception area for customers and visitors. Another aspect to consider is the décor. What image are you trying to portray? Will this require more expensive furniture? Lastly, there is the software. You’ll need an MLM management system and an accounting package. You may require some, all, or none of the aforementioned, but regardless of your requirements, you should be thorough and accurate.
There’s an oft-cited adage that goes: “If you’re the smartest person in the room, you’re in the wrong room.”
A business is only as good as its staff. To succeed, you need skilled people to run it. However, you should not go out and blindly hire employees. You should be meticulous about who you hire and realistic about what you can afford. It is often better to have a few very good people than a larger number of inadequate people.
Estimating the full cost of each new employee can be tricky. In addition to wages, you will need to add the contribution towards benefits, social security, payroll tax, and insurance. Every employee also needs space to work, equipment and training.
Finally, there are staff acquisition costs to also consider. The recruitment process itself comes at a price, and if you are using a placement agency or headhunter, this can be staggering to say the least.
Never forget to consider electricity, Internet, water and telephone charges – especially if you are trading internationally. For instance in the US the Internet is extremely cheap, whereas in some European countries is can be a serious expense. You can estimate an average monthly amount but do it based on the actual costs of the area that you will be trading in.
Exponential growth is what makes MLM attractive.
It is also what makes it terrifying! For this reason, stock management is a critical aspect of your pre-launch plan. There are numerous factors to consider, but the most troublesome and pernicious one is calculating your stock requirement to accommodate network growth.
Let me give you an example:
Let’s say that you are marketing health supplements and your supplier has a six-week lead time. You will need to estimate your growth and ensure that you have at least 12 weeks’ worth of stock on hand at any given moment. This is easy if your business is experiencing linear growth. But what happens when sales take off and you start experiencing exponential growth? Many MLM start-ups have failed simply because they are unable to meet demand. This is known as over trading. In a traditional business, this can be controlled by reducing sales activity. In an MLM business, you have absolutely no control. You cannot tell your network to stop selling - they will lose faith and leave.
I have seen companies double their sales month on month for 12 consecutive months. Let’s think about that for a moment. If you have sales of 10,000 per month and your business experiences a fast vertical growth phase, you would have sales of over 20M per month at the end of 12 months.
Even with a 600% markup, you would have purchased over 40M in stock, and you would have needed to finance the 6-week rolling lead time. By month 12 you would be holding close to 35M in stock and have at least 40M worth of stock in production.
I tell my clients that when it comes to stock management, they need to have access to substantial finance at very short notice.
Gaining momentum fast requires a substantial investment. It is a critical part of your business strategy. Suffice to say, calculate the costs accurately and then allocate the money.
Other start-up costs can include repairs and maintenance, professional fees, credit card fees, license and permits, industry association fees and so forth. We have a sample business plan on our site. Please take a moment to download it and review a more comprehensive list of costs.