Doing Your Homework
making and managing the money
Costing and pricing
If you are planning to be a consultant, how you will charge out your time needs to be considered, and established from the start. If you are planning to manufacture products, you'll need to calculate how much it costs to produce them, including your time. If you do not price your service or products correctly you will not generate sufficient income to sustain your business, or create a profit.
As a consultant there are several ways to calculate your charges:
- an hourly rate;
- a project rate;
- a flat rate; or
- a going rate.
All of your available hours for working will not be billable; you cannot expect to charge-out 9 hours per day, 7 days a week for a year. Realistically, you will probably spend at least 30% of your time doing things which you cannot charge for, eg marketing, delivering, meetings, telephone calls, working on the computer, sending and answering emails, personal and family time. Once the task/job/project is completed, be sure to issue invoices promptly, and collect outstanding amounts by the date due. It is recommended that you attend the SBDC's Costing and pricing workshop if you have any concerns about how to price your services.
Managing Your Cashflow
The time lag between 'earning' the money and 'receiving' the money sometimes creates a boom - bust situation for small business operators and it can be difficult to manage the cash flow to meet financial commitments. It would be wise to have a bookkeeping system that follows-up on accounts after 30 days, but budget for receiving payment on a job/project up to 90 days after the work is finished. Meanwhile, you need to know what your outgoings are going to be, and budget for them in advance. You can do this with a cash flow forecast.
A cash flow forecast is a management tool and usually covers 12 months of business activity. It is a summary of what you expect your monthly earnings and costs to be. The net amount is what the business has available at the end of each month (this is not necessarily profit). The basic format of a cash flow forecast is:
- your commencing cash balance;
- add your budgeted cash inflows;
- deduct your budgeted cash outflows; and
- the result is your budgeted cash balance.
As a starter in business you may find it simpler to do a three month cash flow forecast, showing estimated targets, and actual achievements. Once completed it could be used as a guide to preparing a 12 month forecast.
The SBDC, through the Small Business Centre network has a half-day workshop on cash flow management called Ca$hflow Today. For more information about the workshop, Tel: (08) 9220 0222, country call 1800 199 125, or online: www.sbdc.com.au. To contact your nearest local Small Business Centre, Tel: 1800 093 340.
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