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Do you know what revenue looks like for next month? What about the month after that?
A cash flow forecast is incredibly important. Cash is survival. If your business doesn’t have cash, you’re done!
You can be profitable on paper, but without cash in the bank, you can’t pay your bills, cover expenses, or make payroll.
A lesson I’ve learned this past year is you have to earn the right to think long term. By default, I tend to make long-term investments. This is great if you’re around in several years to see the returns, but if you don’t survive until then, it doesn’t matter!
You have to focus on short-term cash flow and making it predicable. That’s what we talk about in today’s show.
In doing research on this topic before recording the show, I saw a lot of advice saying to borrow money, talk to banks about getting a loan, or run an extreme sale when you’re in a tough spot.
These make sense logically, but they conflict with my no-debt mentality and my decision against discounting and devaluing my products. What this forces me to do is think creatively.
If I’m in survival mode and I can’t borrow money and I can’t discount my products and run an extreme sale, how can I generate cash flow? That’s where you truly get creative.
Learn how to produce a cash flow forecast even if you don’t have recurring revenue coming in.
Highlights, Takeaways, Quick Wins
- The goal is to get to the point where your business is generating its own cashflow.
- Initially, you have to invest in your business. You need cash to do this.
- Focus on what’s making you the most money right now, and keep doing more of that.
- When you have cash in the bank, you free yourself up to focus on whatever you want to do.
- Don’t focus on a bunch of things that are mediocre—focus on the one thing that’s great.
- Schedule clients months in advance to build a queue (even before you need to schedule clients).
- If you’re running out of cash, think fast and act fast.
- Earn the right to think long term by taking care of short term money.
- Be creative in how you can make money.
- Talk to people who have experience in your industry to get an idea of when you will get a return on your investment.
- When you’re in survival mode, you need to audit your expenses.
- See products as something that money is sunk into, not something you’ll get money out of.
- Double your price if you won’t lose half of your customers.
- 05:07 Sean: You need cash to survive. You have to have it. Your business needs it. You can technically be profitable on paper and not have cash in the bank—if that’s the case, you’re done.bank. There are different reasons why businesses might not have cash. Maybe they have clients or customers, and they have all these outstanding invoices and people haven’t paid them, or they don’t have consistent revenue and consistent work. They don’t know where the next money is going to come from.
- 05:56 We want to talk about the importance of cashflow today, why you need it, bridging the gap between investing money and making money off of those investments, producing a cashflow forecast, and then a little bit on a cashflow survival guide at the end. I was doing some research, and it seemed like everything I read on cashflow provided pretty similar pieces of advice. Let’s say you’re in a bad spot. You’re running out of money, and you have a few options—these were the articles I was reading. The articles were saying that, in the context of running a business, maybe you have a really big salary. You can pay yourself less, you can take out a loan, or run an extreme sale.
- 07:03 It said, “Make sure the customers know not to expect this,” and I thought, “They’re not going to hear you! You’re teaching them.” I understand where that’s coming from, but that’s not how I want to operate. The last one was basically, “pull the plug quick,” make it end and don’t drag it out. If you’re done, just be done. I swear, there are these mattress companies that are perpetually going out of business. They’re always having Going Out Of Business sales, but it seems like they did it last year.
- 07:46 Ben: I think they’re liquidating their stock. They’ve got new models coming in.
- 07:59 Sean: I guess some people use that as a strategy. I was trying to think creatively. Okay, we don’t want to run an extreme sale, but does that give me any ideas? Logically, running an extreme sale makes sense. Borrowing money, when you’re about to go out of business, makes sense, because you’re done otherwise. It doesn’t align with my values. It doesn’t align with not going into debt and not discounting. That forces me to think creatively. We have a certain runway with payroll right now, and a lot of people in my position would probably be freaking out and/or borrowing money.
- 08:45 I don’t allow that to be an option for me, so it forces me to be creative. It forces me to come up with other solutions. We’ll talk about that towards the end of the show in the Survival Guide area.
Why You Need Cash Flow
- 09:03 Cash is survival. What we mean by cash is having actual, liquid money. If you’ve got some 10 year investment and it doubles year over year, that’s awesome, but you can’t get that money out. You can’t always get your money from the various investments that you have, so you can’t pay your bills. You can’t pay payroll. You can’t pay rent. You need cash, actual money in the bank, in order to survive, so you need to make sure that your business is generating cash on it’s own. If you’re starting up a business, you’re going to need some capital upfront.
You’re going to have to invest in your business to build it up so you can sell products, deliver services, and eventually make some money.
- 09:52 In the beginning, you’re going to need capital from somewhere. That’s probably going to be your own money, but some people borrow money or take on investors. You need to get to the point where the business is generating its own cashflow. We’re not talking about trying to create the next big startup where you’re not profitable for five years because you’re just getting a bunch of investment money and you’re hoping there will be a payoff in five or ten years. That’s not what we’re talking about. We’re talking about something simpler than that, that’s much more viable, that’s actually generating money.
- 10:29 You don’t know that those payoffs will happen. For every startup that makes millions or billions of dollars, there are hundreds of other ones, if not thousands of other ones, that fail. They get all this investment money, and then they fail. They were hoping for more investment money, but what is your business model? What’s your monetization strategy? If you’re just trying to make something cool and you think that money will come later, it might not come later. You have to figure out a way to make some money.
- 11:02 Ben: I don’t know from a lot of my own personal experience, because most of what I’ve done has been freelancing with light ventures into building something sustainable. It seems like that is the biggest challenge that you face, over anything else. Figuring out how to grow the business and when to hire are important things, but the biggest hurdle in the beginning is getting your business to a place where it can survive on its own. You’re nurturing it to a place where the money it’s making on it’s own is covering what it costs to run it.
Until you get cashflow figured out, it’s dangerous and potentially harmful to focus on other aspects of your business.
- 11:59 I’m talking about trying to develop things, expand, or hire. Maybe Sean can speak a little bit more to that. That may be me being overly cautious, but until you get to that point, that’s where all your focus and attention needs to be. Sean, is it good to also keep an eye on ways your business can develop and grow? Is it good to think about hiring in anticipation of potential growth before your business is at a place where it’s supporting itself?
Focus on What’s Making Money
- 12:53 Sean: Try and get to a place where your business is self-sustained. In the beginning, it’s going to be funded by you and money you have from other places and time you’re not getting compensated for. The goal is to get the business to a place where it is self-sustaining, and to get to that point, you should focus on what you’re about. Merinda said, “How do these people get investors without a business plan?” That’s a great question. It’s surprising how easy it is to get investor money in this time, right now. People with money are hoping they get the next Instagram, Facebook, or whatever, so there’s a bubble right now where people are eager to invest money, and a lot of them will go off of a gut feeling.
- 13:46 Even if they don’t have a business plan, there are a lot of people getting money right now that ends up being wasted. Focus down on something and be the best at that to make money with it. Focus on the thing where you are making the most money right now, and keep doing more of that. Don’t branch out yet, until you’re totally self-sustained. Do more of the thing that’s working the best for you. Simplify down. Yes, it’s great to have diversified sources of revenue, but you don’t get that by chasing a bunch of things all at once.
- 14:24 You’re not going to get to a really powerful sustained business by focusing on all these things at once. Focus on one thing until it becomes bonfire status and then it becomes a huge source of revenue (Related: e121 Seriously, Am I Screwed if I Have Multiple Passions?). Then you can focus on something else, because that fire is still going. Eventually, you have diversified sources of income.
Don’t focus on trying to grow too many diversified things at once, because you’re going to have a bad time.
- 15:03 Ben: We’re talking about cashflow being survival. If one of those fires goes out, there’s no point in having the rest of them. The anxiety of that and the potential distraction not only divides your focus, but you’re also costing yourself focus because of your attitude toward the situation. If you’re nervous or concerned and there’s some question or anxiety there, it’s going to take away from your ability to be productive in those other areas. It makes a lot of sense to get that going solid so you can walk away from it and not be concerned about that fire going out.
- 15:52 Sean: What are you best at? What are you most profitable at right now? Don’t focus on a bunch of things that are mediocre—focus on the one thing that’s great. Making $100,000 is great, but it’s not great when you have $101,000 of expenses. Having a bunch of money isn’t the only thing. It’s about making sure that money is profit. Don’t necessarily focus on the thing that makes the most money. Focus on the thing thats is the most profitable, and do more of that. Try and scale that.
- 16:32 Ben: Once you get it to a place where it’s at least a little bit profitable, even, then you can focus on the kinds of systems you can build to make this more efficient, so you can do it in less time and make it more profitable.
Don’t Do It All at Once
- 16:52 Sean: I see this a lot. People have a day job and they’re trying to start a side business where they provide services and are also trying to produce products and maybe even teaching about that, all at the same time. Those are all great methods of making money, but when you’re doing them all at once, you’re not going to get traction. Go all out on client work. Stop trying to put products in your store. Stop trying to sell things. It’s taking up all of your focus, and that’s a huge investment. You want to make gift cards, t-shirts, posters, bags, or whatever it is—that’s a huge investment.
- 17:37 You’ve got to vet your manufacturers, you have to have a bunch of cash upfront to get inventory, you have to store that inventory, you have to ship things, and you don’t even know all of the problems you don’t know yet because you haven’t experienced it. You’re going to find, “This shipping method is bad, because four out of ten posters end up getting bent.” Now, you’ve got 100 of these tubes that are shipping posters and bending them in transit, which means that they’re no good and you need to buy more. You’re just figuring all this stuff out. Meanwhile, the USPS increased international shipping rates and you didn’t even notice, so you’re losing a bunch of money.
- 18:22 You’re not going to make money from products for two or three years, and that’s if you invest all of your full time focus on it. I see people trying to start up products while they’re kind of trying to get client work and kind of trying to do a blog once a week, and they still have a day job. That’s suicide. You need to get cash. What is the thing that makes you money now? Get a nice runway in your bank account. Do some client work for 6, 12, or 18 months on top of your day job, where you don’t need that money because you’re already paying your bills, and save that money. Put it aside.
When you have cash in the bank, you free yourself up to focus on whatever you want to.
- 19:07 You can make choices. You have that freedom. When you’re focusing on too many things at once, you’re going to get to a point where you’re trapped in a corner and you can’t do anything.
- 19:17 Ben: I feel like I’ve heard this consistently from different people who have been in business. They’ve been in situations where they have to wait to start something. That’s not to say that, in the meantime, you can’t take down your ideas and be learning things along the way and be preparing things for the time when you can set out and do products. I hear this all the time: “I’m so glad I didn’t jump into it right away, because the things I learned before I was able to get started allowed me to do a much better job, to be more successful.”
- 20:03 That’s the way you should think about it. Don’t think, “I’m missing out on all this money I could be making off of products.” You might be doing client work and posting some of your work, and people may be saying, “I really like this design. I wish you had it on a t-shirt,” they may be banging down the door for that stuff. Put some processes in place to capture those people and to maintain that interest, but it’s a good thing to wait until you’re at a place where you can do that right and provide a great experience for them when they do buy your stuff.
- 20:47 Or, if you’re going to do a course, you’re probably going to be capturing stuff along the way. Write that stuff down. You can do some of that behind the scenes work, but the level of focus and attention that requires is so different from the focus and attention required by making something public and dealing with everyone’s questions. It’s good to do all of that stuff behind the scenes for now, because then you’ll be that much more prepared when you get to a place where you’re ready to do it.
- 21:24 Sean: You’ve just got to get sustainable cashflow. You’ve got to get money that you can rely on, that you know is going to be coming in. That’s where you want to be. You don’t want to be sink or swim, feast or famine, every single month. You’ve got to get to the point where things are recurring and you can rely on them, and if you’re focusing on a bunch of things, you’re not going to get there. Focus on one thing. Focus on what’s working, and get that consistent revenue. If you want to grow your business, you have to think long term.
If you’re going to think long term, you have to have money you can be sure is going to come in.
- 22:03 You have to be sure about that. If you don’t know what the next 6 or 12 months look like, you can’t plan long term. On the other end of the spectrum, you run into the problem that I run into a lot, which is planning long term too much when you don’t have the right to. Earn the right to think long term by taking care of short term money. I’ve been learning this lesson over the past six months. It’s great to make these really smart decisions for the long run. You’re going to be doing so great in one year, two years, or five years, but if you’re not around, it doesn’t matter.
- 22:53 You’re not going to see a return on anything when you don’t have a business anymore. The first priority can’t be the long game. The first priority has to be survival. You have to have that cash upfront.
Produce a Cash Flow Forecast
- 23:07 Brookes says, “How can I create a cashflow forecast if I have a mix of repeating/recurring work clients and one-time clients? How can I forecast when I’m not sure of when or if a project will begin?” You have a mix of recurring clients and one-time clients. You can rely on recurring clients, but allocate a certain amount of time toward getting and working with one-time clients. Come up with a baseline number, like, “I’m pretty sure I can get one to three one-time clients a month,” or whatever that looks like for you. You have to know that that part of the equation is somewhat variable. The recurring clients are set, but the variable clients are what you’re not sure about.
- 24:10 Ben: I’m actually in a very similar situation right now. I have a mix of recurring clients and some one-time projects coming through. I have some prospects that I’m looking at over the next few months. One, I had to up my rates, because I wasn’t charging enough. I was charging based on what my monthly needs were. I would get an inquiry, and I would price it fairly, but I would have in mind what my budget was for the rest of the month and how much this was going to cover.
- 24:53 I was thinking of things in those terms instead of taking the Value-Based Pricing approach and asking, “What is this actually worth to you in dollars and cents, as in investment?” I wasn’t charging that way. I found out, going that way, that I was worth a whole lot more than I was charging. Also, I’ve been treating each month of expenses like it’s own bucket. I say, “Okay, as soon as the bucket for March is full, anything else I have leftover from this project I’m putting into the next month.”
- 25:36 Sean: A lot of people say, “Well, I met my expenses for this month, so that means I get to do fun things or buy new cameras or equipment for the business.”
- 25:45 Ben: I’m not letting myself think about those things yet. At the beginning of the year, I decided that I have a big bucket to fill, which is my annual expenses. I’m not even allowed to put money in savings until I’ve got that bucket filled. Right now, all I’m focusing on is filling each of the monthly buckets, and then I’ve got a savings bucket. Once the savings bucket is taken care of, then I’ve got other buckets I can start to fill up, like getting better equipment for my business.
- 26:20 Thinking about things that way takes a lot of the pressure off, because it doesn’t feel month to month. Also, when these one time clients come, I can say, “You know what, I’m finishing up a project right now and I have some ongoing clients, so I can put you in May. We can start your project as early as May.” That allows me to create a forecast, because I know that project is coming. I take their deposit to secure their position in May right now.
- 27:07 Sean: This is something we’re teaching in Value-Based Pricing. We got this great review where this woman said that she has been listening for two years and she loves to talk about hard work, commitment, and “harsh Sean,” and she really likes it. She also said, “I also saw a review criticizing Sean’s plugging of his other work. Okay… and? He gives so much value for free in the podcast with no ads. His plugs don’t bother me, because one, they’re always relevant to the conversation at hand, and two, he’s so genuine about it.” I appreciate that. Anyone who has a problem with me saying that I have a course on a related topic can stop listening to my ad-free podcast. I have no problem with that.
- 28:07 At ValueBasedPricing.com, in this course that I have that I’m plugging right now, I teach this. I’m about to give away what I teach in a paid course, so I don’t understand why people complain. The good listeners get it.
Build yourself a queue of clients and schedule them in advance.
- 28:35 If you have tons of clients coming to you, that’s really easy, because you’re just busy. You say, “I’m busy. I don’t have time. It’s going to be a couple of months. Sorry.” If you’re not busy, your first thought might be, “I’m not busy enough to have a queue of clients.” Start scheduling them anyway. That’s how you get the queue. A client comes to you and you could work on it right now, but you say, “I’m not available for a month,” and you schedule them out. Take a 25% non-refundable deposit now, when they want to get on the schedule. Then, it’s a 25% payment before we start the work.
- 29:21 Say, it’s May. When we get to May, they pay me the other 25%. Now, I have half of the money upfront, before even doing the work. Then, I do the work, and I get paid the other 50% before I send them the deliverables or the finished project. By doing this, then the next person comes along, and you can say, “I can start the second half of May,” or, “I can start in June,” and you start scheduling people out like this. It becomes a normal thing. Let’s say that you could have taken another project in May, but you don’t. You say, “I can start in June.”
- 30:01 If you give yourself enough buffer, let’s say someone comes along and says, “Can I work with you?” You say, “July is the next availability that I have.” They say, “Well, we really want to get this done sooner,” and you can say, “I’ll tell you what. We can do a rush fee to do it one or two months up.” Now, you go from feast or famine every month to having clients scheduled out to where, if they want to come up sooner—even farther up than you would have taken them before—they’re paying you a rush fee on top of that. That’s a good place to be, so start scheduling people out even when you don’t have to.
- 30:51 Ben: That’s difficult if you are genuinely going from month to month. As soon as that client comes to you, as fast as you can get their money and start on the project, you need to turn around and spend that money on your bills. That’s not the place you want to be when you start doing that. Be in a place where you have your bills covered, and then schedule out. Or, if you need to, schedule ahead even though you would like to have that money right now, and sell a bunch of stuff on Craigslist to cover your bills and start that positive cycle.
Making sacrifices so you can schedule client work ahead is so worth it, and it feels really nice.
- 31:44 As tough as it is to know that you have to stick within a budget and as nice at it looks to have cash in the bank, it’s hard to do, but it definitely doesn’t trump the feeling of knowing that you can anticipate what your months will look like going forward. This year, I’m going to fill my yearly bucket before the year is over, and then I’m going to start thinking about my savings. I’m going to start building that buffer, and I’ll fill that up before the year is over. Then, the money that I’m going to have to spend on equipment isn’t going to have to come out of my monthly expenses. It’s not going to have to come out of my savings, and that feeling is unbelievable.
- 32:47 Sean: On the cashflow and profitability thing, you have to be smart about this stuff. You can trick yourself on paper. For example, if a business sold a bunch of equipment, it would look like they have a bunch of cash, but how are they going to produce products? They need a long term plan. Be smart about that. You need to have a cashflow forecast and know where you’re going to be. Have a list of your expenses and know what your margins are, whether that’s products—which cost money to produce and to ship—or services—because it costs money to rent an office, have the lights on, pay for internet, or drive to and from work.
- 33:45 There are baseline costs that take away from your profit margins. You need to know what your magins are. Know what your expenses are, the money that’s going out, but even of the money that you’re making, you have to know what your margins are. As much as possible, focus down on the thing that’s making you money and simplify that. Try as much as possible to schedule things out. Get recurring clients, recurring subscriptions, or a queue of clients scheduled out, so you can always think a minimum of three months ahead. Any time a client comes to you, awesome. Now we’re into four months. It’s so much better than going month to month and having no idea what’s next, because you can’t plan for things.
The Investment Gap
- 34:40 The gap is the time between when you invest money and when you get money back from that investment. Maybe you do want to get into physical products now. You have some cash and you have been doing client work for 6, 12, 18 months, and you’ve been saving the money. Now, you want to make products. That’s going to take a bunch of money upfront. It takes a lot of investment. Maybe you want to build an app. Maybe you want to put on an event. This costs money upfront. Eventually, you can make that money back and then some, and that’s your profit. The time between the investment and the return is nothing—you’re not getting anything for your money during that time, so you’re not going to have cashflow from that venture.
- 35:28 You need to have a plan for the gap. That could be more savings, if you have more money, not spending all of your money on products or investments. It could be other ventures. Maybe you’ll do client work between this point and that point. Maybe you’re going to focus on increasing your subscribers or your sales. Maybe you’re going to do a promotion. Maybe you’ll run a campaign, sell a course, or you’re expecting a revenue spike. Whatever it is, have a plan for it.
Cash Flow Survival Guide
- 36:12 The first thing you want to remember is fast action. If you’re running out of cash, think fast and act fast. The first way you want to act is to try to survive. To jump ahead real quick, if you know that you’re done, also be fast to pull the plug. Don’t drag it out. That’s not helping anyone. It’s not helping your morale and it’s not good for your employees. If you know that you’re done, just be done. Don’t bleed out. One of the things that I think was good from the advice I mentioned at the top of the show was to cut your pay. If you have a business and you’re paying yourself a lot, a quick way to get money would be to cut your own pay.
- 37:05 If you don’t really need all of the money that you have, cut your pay. That’s a way to get money. You can also limit your expenses, and you can be creative with how you make money. This is something we’re probably going to do, that we need to do. My mindset tends to be focused on making money. I don’t care about expenses, and you could say that’s to a fault, but I’ve been okay so far focusing on making money. I don’t think, “Oh no! A Starbucks drink costs $5!” I’d rather spend the time it would take for me to make coffee on my business. That’s a simple example, and maybe it’s silly, but there are other examples.
- 37:55 Maybe you need someone to prepare food or mow your lawn, whatever you don’t want to be focusing on. You can pay someone to do those things so you can make more money. That’s a good thing. Those are expenses. I tend to not worry about expenses, because I apply myself so heavily toward the things that will make money that it offsets it to a much greater degree.
When you’re in survival mode, you need to audit your expenses.
- 38:32 Right now, I would say that we’re in survival mode. We have a revenue plan and a cashflow plan for the next six months, but I haven’t been auditing my expenses. When we’re in survival mode, I need to audit my expenses. Do we really need this? Can we downgrade this plan? Can we cut out this service? Can we apply some of our own employees’ paid time toward solving this problem instead of paying some external solution? Audit the expenses you have, but also be creative in how you can make money. This is a part that a lot of the advice I saw when doing research for this show didn’t talk about much—being creative. It was like, “If things are getting desparate, start talking to banks about getting loans.”
- 39:27 That just sounds gross to me. I don’t want to be in a place where I’m trying to get out of a hole, trying to crawl back to zero. I don’t want to put myself in that place. Someone in the chat was asking, “If you don’t have a bunch of money, and you’re in a lot of debt, should you be investing in courses and learning materials?” I don’t think you should be. Number one, because there’s a ton of free value online. Paying for education is about the quality and the consolidation. You can get higher quality education for money, and you can also get a more consolidated education for money. When you poke around on YouTube videos for something, there’s going to be a lot of wasted time and poor quality, but you might find some nuggets.
- 40:27 If you don’t have money, take your time away from Netflix, bowling, or whatever, and use your time instead of your money. You don’t have money if you have $1,000 in the bank and $9,000 in debt. That’s how you need to think. Don’t think, “Well, I have $1,000, so should I be spending that money?” No. Don’t spend more money. Be creative. This is what I like about the No-Debt Mentality. Even when you get in desperate situations, it’s like the episode we did on responsibility vs. excuses, I could say that this is a legitimate excuse to borrow money, because I think that we’re going to get out of this slump and we’ll make money in six months (Related: e250 Own Your Life by Taking Responsibility for Everything).
- 41:11 We just need to ride out this situation right here, and we need a little bit of cashflow to pad the gap. It makes sense to borrow money, but it’s too easy. The No-Debt Mentality forces me to be creative. That’s not even an option, so what are we going to do? Maybe I don’t know what the solution is, but now I have to be creative. What assets do we have that we can leverage? What information do we know that we can turn into a course and sell? What memberships do we have that we’re not promoting enough? What products do we have that we’re not telling people about?
- 41:52 What skills do we have that we’re not selling? Maybe you could do consulting. Maybe you could do paid speaking. Maybe you’re already asked to speak, but you’re not confident enough to ask for money. Ask for money. Don’t take it on if it doesn’t pay you. Maybe don’t do anything at all in life or business that isn’t paying you right now, because you can’t afford that. Charity is great. Doing good things for people is great. Mentoring people is great. If you’re in survival mode, you can’t do that. You have to cut it out.
- 42:29 Ben: We had this moment where we were auditing everything and looking at all of our expenses. We were saying, “This, we’ve got to cut out. This, we’ve got to cut back,” and we came to a place where we had a really slim budget. We said, “Okay, this is what we’re going to do. This is our budget.” Then, we started talking about how we could make this creative budget work consistently. Be really careful not to get too comfortable three or four months after you’ve established that. Everything seems to be running smoothly now, and it’s easy to get to a place where you’re comfortable and you start relaxing on that stuff.
- 43:25 That’s not to say that survival mode has to be indefinite, but upfront, define the duration of that and set some parameters. For us, that looked like saying, “Okay, we’re not going to spend any money outside of our budget until we’ve filled this entire bucket. We’re not spending any money outside of what we’re saving until we’ve filled that entire bucket.” It wasn’t until a few really big buckets down the road that we made some room for expansion in our monthly budget. We have to remind ourselves of that constantly, because now we’re in a place where we’re a few months ahead, and everything feels a little bit less tense.
When you get out of survival mode, there’s a temptation to splurge.
- 44:26 If we didn’t have a plan, that’s probably exactly what we would do. I encourage you to have a plan for what the parameters of that survival mode are going to be and how long it’s going to last. How do you define the end of that, and what will you do going forward?
- 44:46 Sean: Define your monthly expenses. Do this for your business, but also for yourself, especially if you’re a freelancer. A lot of this is very closely related, the personal and the business. If you have a business and you’re paying yourself on a payroll, maybe you could lower that down to whatever your minimum is. If you’re a freelancer and it’s all self-employed income, still define what your monthly expenses are, because then you have an idea of what these buckets are. What is the size of the bucket of your monthly expenses? If you need $4,000 a month to pay bills and in the last month, you had your best month, and you made $12,000 off of a couple of client projects, it’s not $4,000 for your monthly expenses and $8,000 leftover for fun and games.
- 45:43 You’re running a business here. That means that you fill up the next three buckets, and that’s it. You have to come up with what that runway is and what amount of buckets you’re comfortable with. That’s the minimum that you have to fill. When you start doing this, it changes your mindset entirely. There are times when I have six figures in the bank. Ten years ago, I used to think about having $100,000, and I would think, “Man! If I just made $30,000 or $50,000, that would be awesome. What would I do with all the money? $100,000! I would buy cars and probably boats…” As you can tell, I didn’t know anything at that point.
- 46:29 I would imagine myself having all the fun in the world, going on trips, and traveling. Now, if I have $100,000 in the bank, I think, “Okay, we’re good for three months. We can cover payroll.” You think in different units, and that’s where you want to be. Think in terms of buckets and come up with the minimum runway that you’re comfortable with.
When It’s Time to Build Assets
- 46:59 Robert said, “You talked in How to Build Business Assets the Smart Way about focusing on cash flow before expending money and energy on developing other assets. How do you know when you’ve reached a point where your cash flow is good enough for you to focus on building up other assets and growing your business?” In episode 234, I talked about getting cashflow first before building assets.
- 47:33 A lot of people are trying to build assets too soon, and they’re going to crumble away. You’ve got to have a solid foundation first. He’s asking how you know when you’ve reached a point where it’s good enough to start investing in assets and growing your business. This is the runway thing, the buckets. Build assets when your runway is long enough to cover the amount of time you think it will take to see a return on those investments. Maybe you want to start an apparel line or a new product line, maybe you want to develop a new tier to your SAS app, maybe you want to develop an iPhone application, or maybe you want to build an online course.
- 48:26 How much time will it take to see a return on the asset you’re building? You’re going to put money and time into it. Maybe you hire contractors or pay printers, whatever it is, it’s going to take time and money. Eventually, you’re going to get that money back. How long is it going to take? You have to have a projection. If it’s going to take six months or eight months, that’s how long your runway needs to be.
- 48:50 Ben: Depending on how conservative you are, you might even double that. Sean says that it takes at least two years to get a return on a product business.
- 49:02 Sean: I would say two to three years if it was your full focus, because the money you make needs to go back in if you want it to last.
- 49:12 Ben: If you want to keep operating after that two or three years, you need to build it up. That seems like a long time, but I’ve also felt the shortness of two to three years.
- 49:27 Sean: We started this podcast in 2013, literally two to three years ago.
- 49:39 Ben: What if you could get a runway of four to five years? How much more freedom would you feel to really do that well and to go all out? That has to do with your level of comfort, but talk to as many people in that industry as possible so you can get a really good idea of what to expect in terms of how long it will take to get a return on your investment. A lot of people think, “Okay, I’ll put a product out and build an email list, and it should take about this long for people to start paying me back,” and they do their own fuzzy math. They base their decisions on that.
It’s worth the time to talk to people who have experience in your industry to get a better idea of when you will get a return on your investment.
- 50:35 I know that in the times when I haven’t done that, it’s been because I’m afraid that I won’t like the answer. I want to think that I might be the exception to that rule.
- 50:49 Sean: Aim to be an outlier, but plan for being part of the average. Talk to people, but come up with a plan.
- 51:05 I made this mistake when I was initially focused on doing apparel. We have shirts at the seanwes store, but it’s not our focus right now. It’s fun, but it’s just not profitable. Your margins are abysmal. Even if you have a premium product line, you’re not going to make money that way. You could make a few thousand dollars or maybe a few hundred thousand dollars, maybe, if you’re doing really good, you have a team, you’re streamlined, and your marketing is amazing. This would be after five to seven years of doing this as your full time focus.
- 51:43 That’s fine, if that’s your passion. The margins are so low with physical products. You have to make this thing, print it, package it up nice, and ship it. The next thing you know, your profits are done. They’re over. So, we stopped focusing on this. If you are going to do physical products, although you can apply this to a lot of things, have a plan and sit down do the math. This is what I tended to do: “Okay, I’m going to spend $2,400 on printing costs and produce a line of whatever. I’m going to market it and launch it at this time. We’ll probably get this many sales in the beginning. We’ll try and do some ongoing promotion. If we estimate an average of several dozen sales over the next couple of months, we’ll probably get our money back by this point.”
- 52:40 I projected all of that out and thought about the money we would make, but I didn’t subtract all of the costs from it. I don’t subtract the initial investment, and I don’t even factor in the time and effort that I put in. When you really factor in all of those things, there’s almost no profit. It really only works on a huge scale. Be really aware of this. If you want physical products you’ve made to be in someone else’s hands so they can hold and touch them, it is an amazing thing and an amazing feeling, and that’s something you should do if you’re really passionate about it.
- 53:22 But understand that there’s not a lot of money in it until you hit a really mass scale or you have extremely high prices. Whatever is premium in your market, double that if you really want to be making money.
See products as something that money is sunk into, not something you’ll get money out of, because it’s such a long game.
- 53:47 Ben: That might change a little bit where products represent a brand that sells other products that have really high margins. In that case, the products could be considered a low cost marketing piece of your business. It’s a funny way of looking at it. People go into apparel and products wanting to make money off of it, but some businesses use apparel and products as a form of low cost marketing. They know that they’re losing money on it, but they’re thinking that they’re either going to lose money on marketing that’s going to go away, or they’ll lose it on this and people will wear it everywhere. It will be part of their daily lives.
- 54:43 Sean: That’s pretty much how we approach physical products. We’re not focusing on that right now, but in the next three years I’d like to revamp our focus on it purely as a marketing effort. It wouldn’t be to get money, but to sink money in it on a micro-scale. I used to have a wooden, laser-cut, laser-engraved ampersand keychain, and after you talk about the bag, packaging, keychain hardware, manufacturing costs, shipping, and all of that, we made no money on this. We may have even lost a little bit of money, because we sold it for $8 with free shipping. It’s a keychain. Once you get into the double digits for a keychain, you start to lose people.
- 55:36 Yeah, we could charge $15 for it, but if we lose more than half of our customers, it’s not profitable, and we probably would once we break that threshold. We hit a sweet spot of $8, because if you’ll pay $8 for a laser-cut, laser-engraved, cool ampersand keychain where you don’t even have to think about shipping, you pay for it and it’s done, it’s a total no-brainer. Doubling your price is a great idea if you don’t lose half of your customers. Think about it. You’re making money! It doesn’t matter how many customers you have. It matters what your profitability is. I was pretty sure that if we increased it, we would lose more customers.
- 56:31 I saw this as a total loss-leading product. I basically gave away this keychain because it’s my logo. If someone wants to have my logo on their keys every single day, that makes them think about my brand, my podcast, and joining the Community or going to the seanwes conference, that makes sense. Products can make sense for you monetarily if you think about the bigger picture and you have a plan.
Investing in Educational Material
- 57:12 Emily says, “Not really a question, but I am very interested to hear about bridging the gap between investing and making money. I am struggling with wanting to spend a lot of money on things that I know will benefit me (courses, resources, tools) but might not help me make money right away. All good things, but I might be jumping the gun.”
- 57:33 Ben: Sean already kind of answered that. There are so many free resources out there, but you could also use this shortcut. You can join the Community for $39 a month. You’ll have access to people who are already curating and sharing amazing resources and information. If you were to do it the old fashioned way and go do a search for stuff, you can find information about whatever you’re looking for. It’s better to do that so you can focus your energy on making your business sustainable right now, so when you do have the time and the resources to spend money on courses and things that will have a stronger impact, those will be greater multipliers for you if you’re in a place where your other stuff is covered.
- 58:39 Sean: For people who have a bunch of money and are making a bunch of money, everything is a huge multiplier. When they’re reading a book, a piece of advice could make them millions of dollars. That’s one little thing. If you focus on building up what will be multiplied first, then the value of the educational material that you want will have a greater impact.