Last week, we talked about Hiring Your First Employee, and I shared two frameworks you could use to help you determine if you are ready to hire an employee or not.
Today, I want to discuss one of the most important activities you can do in your business – revenue planning.
Revenue planning is about forecasting your revenue and then deciding how you will allocate it against expenses and/or investments in your business.
It will help you determine if you can make business investments like hiring employees to scale your service offering.
Looking at your numbers, you might be surprised to find that you can afford to hire an employee for the next six months without significant financial risk. But you won’t know that unless you know your numbers and plan what to do with your revenue.
Let’s take a deep dive into revenue planning and why you should do it.
Expanded Video Transcription
Revenue Planning 101 – What revenue do you expect?
When it comes to revenue planning, the first thing you need to understand is expected revenue. Expected revenue is the timeframe when new revenue sources should be flowing into your agency business.
When you’re selling services, the primary indicator of expected revenue is when a service agreement payment is due from clients.
Example of Revenue Planning – Cable Guy SEO Services
Tom Carrey from Cable Guy SEO Services, LLC sells Local SEO to cable companies.
Tom recently submitted an SEO Service Agreement to the CEO of Dumbcast, Inc for $3,750 per month for six months, where payments are due on the 9th of each month.
The SEO Service Agreement states that upon signing the client, Dumbcast, needs to pay $3,750 plus a set-up fee of $5,000 by April 9th, 2018 to commence the Local SEO Project.
Tom Carrey notes in his Revenue Projection Sheet that on April 9th, 2018 he expects revenue of $8,750 from the potential client Dumbcast, Inc, and then on the 9th of every month, Tom expects $3,750 in revenue per month for the next six months.
In the above example, it’s easy for Tom to forecast this revenue is coming because payment dates are explicitly stated in the SEO Service Agreement.
As long as the work is completed and the relationship remains in good standing, Tom can reliably know that his expected revenue from just Dumbcast, Inc is $3,750 per month for the next six months.
Revenue Planning 101 – Why you should do it
Revenue planning allows a business owner to project when revenue will be flowing into their bank accounts, and at what frequency. Projecting revenues 6-12 months into the future means a business owner can have a big-picture understanding of their future profitability or business losses based on an unlimited number of business scenarios.
The ability to project scenarios acts like a crystal ball into the future for business owners. It’s highly unlikely that any single scenario will play out precisely as projected. However, seeing several situations at one time allows the business owner to form a mental model for the future of the business. This mental model permeates into every decision moving forward.
Revenue planning will help you decide:
1) What business investments you can make to grow and scale your business.
2) What business expenses you will be expected to pay and when.
As you grow and scale your agency business, you should plot expected revenue and expenses into a tracking spreadsheet or accounting system. This projection allows you to track when revenue is coming in alongside costs.
Sophisticated agencies will start with expected revenue estimates to draft financial projections and operating budgets. These statements will show where the agency thinks revenue will be coming from and where they plan to allocate that revenue.
Revenue planning helps you decide what to do in your business from an investment and expenses standpoint so that you can grow or scale your agency comfortably.
Are you ready to expand your business?
A lot of times the most significant concerns we have as business owners are whether or not we should expand to meet or grow demand. Revenue projections help us understand if we can afford these risks and how long that risk will be sustainable.
A business expansion could be tapping into new markets, it could be going after new clients, or it could mean hiring employees.
When you hire employees, it’s a major consideration. The most significant concern is whether you can pay employees six or twelve months from now, not just tomorrow.
To get over this concern, I recommend projecting your current revenues for at least six months into the future. Or if you have the data, twelve months or through the end of the current year. Then compare what you would have to pay an employee salary + benefits over this time.
You should be able to determine whether or not the revenue coming into the business is going to be able to support onboarding an employee into your agency business.
Example: How Revenue Planning Helps You Determine Business Decisions – Should Tom hire Larry as an SEO Manager?
Tom Carrey from the Cable Guy SEO Services wants to hire Larry Backlinks as an SEO Manager in May. Larry is asking for a salary of $4,000 per month. Tom knows that in May he will receive $25,000 in total revenue from his five clients, but his budgeted expenses are already $20,000, excluding Tom’s salary of $4,000 per month. Should Tom hire Larry as an SEO Manager?
Not if you take into account Tom’s salary of $4,000 + $2,000 in benefits. That means Cable Guy SEO Services is losing money for May. It’s not a good idea for Tom to hire Larry as an SEO Manager unless Tom wants to dip into his cash reserves, take on debt to finance the hire, or not pay himself.
However, if Tom established a revenue planning process to project an anticipated revenue windfall of $50,000 per month by August, then investing in Larry’s services makes sense. Tom is risking a small, short-term loss in anticipation of big profits down the line. Tom also takes comfort in knowing that the Larry investment will make his company significantly more profitable at the end of the year.
The only way a business owner can make this determination logically (and not emotionally) is through a revenue planning process.
What we have just described is revenue planning 101: project expected revenues, subtract your expenses, and calculate your net profit.
Based on your net profit calculation, you can determine whether to reinvest in the business by onboarding a new employee, contractor, or making another business investment.
Planning your revenue helps you take smart risks
If you get into the habit of projecting your finances, you’ll discover whether or not you have the financial capital to allocate to various business activities. This will help you manage your business risk better, by allowing you to make sound business decisions based on your numbers.
Business owners who are not prepared to take on risk are the ones who don’t understand the finances of their business. If you know your financial numbers, especially projected profits, then you’ll be able to take on smart risks like hiring an employee or expanding your business into other markets.
As a freelancer, consultant, or agency owner you need to know when and where your revenue is coming. There’s no time for SWAG (silly, wild ass guesses) in business.
You can’t just hope that a potential client signs a contract and pays everything on time like clockwork. While that is how business should work, many external factors can lead to interruptions or changes in payment terms.
In the end, you will get paid for your work (99% of the time in my case). But it won’t always happen on your timeline.
Revenue planning allows you to project best and worst case scenarios for revenue, and adjust your expenses and investment plans accordingly.
When it comes to revenue planning, I recommend you project your income through the end of the year alongside expenses.
If you’re looking to onboard a new employee or contractor, make sure to project out your sales pipeline, so you know when expected revenue is coming in.
The most important thing to keep in mind is that if you want to scale and grow your service-based business, you need to have higher revenue than expenses. Make sure your business expenses are tight, and you keep them in check. Only make investments when the numbers support your plans for expansion.
Do you plan your expected revenue? How do you make “risky” decisions in your business? Leave a comment and let us know.
This post and video was episode 83 in our 90 Day Challenge digital marketing series.
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