The importance of your own mindset, which I talked you through in full detail back in episode two, and how much your personal circumstances and goals affect business financials. There's an important message as well from none other than Keith Cunningham, which is going to ring through in today's process, and what he said was that a five to ten percent decrease. In expenses can and often will increase profits by twenty to fifty percent. A five to ten percent decrease in expenses to increase profits by twenty to fifty percent. That huge, right? That's not something just to be sniffed at. I'm pretty sure that most of you here today can find that five to ten percent, and if you can, then you are really going to get rewarded in terms of the additional profits that you can find within your business.
So, first things first, I want to address the elephant in the room. I'm British, essentially, most of the time we're going out to a British audience. And it is traditional that we don't talk about money. It's not just the done thing. It's not what Brits do. But today I'm going to start by breaking down that barrier.
This way of not talking about money is continually holding us back. We need to get comfortable with it. Now, I'm not saying that you need to go and shout your personal financial circumstances from the rooftops or post it all over social media, but you just need to get comfortable knowing about it and talking about it.
You need to create a connection with money for it to be real. And if you don't talk about it to anybody, then you can carry on pretending that it isn't. And that's dangerous because last time I checked, money is pretty damn real. I'm going to talk to you as well about hitting your surviving and thriving income, and I want you to be able to be honest with yourself about not only what those numbers are, but how close in reality you actually are to them. So, an abundance mindset. So, before we go into the eight steps of how to create a financial plan, I need to talk to you about mindset and more importantly, about an abundance mindset.
Now, I already went through some strategic planning with you on last week's episode. We're now going to move things forward into the actual monetary side of things. And as people, as soon as money gets talked about that normally sort of invoked, have response and a trigger from us to go, Whoa, ah, yeah, that's personal guys.
And in fact, you want me to talk about it. Yeah. That's scary.
We need to break that down. We need to stop living in this world of fear because if we are going to create a financial plan built off fear, it's probably not going to be the best financial plan. So, I'm going to point out something first. There is lots of everything in this world, if you just believe it. You see, we don't see the world as it is, but rather as we see it, if people are telling you that you are too expensive and that you let that be the reflection of you, then let me just ask you something.
How many of you watching or listening to today have got an iPhone or a Samsung or some other smartphone? that would've cost you close to, or maybe over a thousand pounds. You may well be paying for it, with a monthly airtime subscription, or tariff or something along those lines. But realistically, for that phone, if you went to one of the companies that sells them, you're going to be paying close to or over a thousand pounds.
Now, I can pretty much guarantee that for the majority of you, you don't need it. Now, you might tell yourself that you do, but you don't. That's the story that you tell yourself to justify why you bought it. Now, there's many people out there, mind who have made that decision and they have bought it, and they convinced themselves that they needed to buy it, but they couldn't afford it.
But that didn't mean that they didn't buy. Now, it's easy to be affected by those conditions around us. If we aren't officially already, then we're pretty close to an official recession. And when it gets very close or it does happen, then that news will spread. And generally, as news agencies will do, it will be doom and gloom.
If you allow yourself to believe it, you see, if you decide that there is now no money in the world, then the budget that you create will reflect that. Now, I'm not saying that your business will not be affected if there was a recession. It may well be. What I'm saying is though, that if you just had lie where a recession to happen and you just, simply stand by and let it happen to you. Then you're just going to be a victim.
So, you need to choose to make a decision to do something about it and decide maybe that the only way that a recession actually truly ends is when people spend money, and you have an opportunity here to maybe be part of that ending. By believing that there is enough money to go around and that by taking the necessary actions, that means people do actually spend money. By providing maybe clear communication of your value and what you can do for that potential customer or client.
So, I don't want you to be here listening today because you should do a budget, but rather that you must do a budget. You see, it's the decisions, not the conditions that change our lives. Everyone is experiencing the conditions of today. Everybody has experienced the Covid situation. Everybody's experienced this element of are we in a recession or are we not? but your decision to do something about it by planning strategically and financially is what will change your life.
You see what always making three decisions and today's no different, and those three decisions that we're always making are; number one, "what should I focus on?" Number two, "what does it mean?" And number three, "what am I going to do about it?" Okay, so let's just recap here. One, what should I focus on? Two, what does it mean and three, what am I going to do about it? Remember, make a note of them and just keep those in the back of your mind as you go through the process that I'm going to teach you today.
So, onto the eight steps of a clear budget and financial plan.
Understanding the point of a budget. So, in my view, a business is a tool to help you reach your personal targets. Now, most of the businesses that we talk to have developed themselves or grown themselves probably to at least 150,000 pounds worth of revenue, maybe even 250,000 pounds of revenue. And if you've got yourself to that level where you've got other people involved, then the chances are what you've managed to do in your mind is separate business money from personal money. In order to make that leap from being just a one-man band. That was a clear distinction that you had to make and probably was good advice that you got from people around you, accountants maybe, business advisors, business coaches. However, what got you to that level to move from being, was like employment, but you had a little bit of control to being to that next level by being a business owner. And separating the business money and the personal money. That, however, created a danger that nearly all of us fall into. We massively overspend in our businesses and we don't have enough money to pay ourselves.
Just let that sink in. We don't pay ourselves from our business anything or enough of what we deserve because we massively overspent. Now, often we overspent on things that we thought God as cool business expenses. But they actually, if you really looked at it, have they actually added any value to the customers, to the team, to you?
Sometimes it's the complete flip. You've taken so much money out of the business that your business is massively underfunded. You possibly can't even pay the upcoming tax bill, the vat, the suppliers, the staff. And it's easy to blame business performance, but actually without a plan of when and how you would spend the money that's within the business. What did you expect? You see, this is where a budget comes in. The word budget often invokes fear. We hear about it through the government and creating and setting the budget and its bad news and its doom and gloom. We hear about it in terms of, "Oh, you must spend the budget before the financial year ends". It's all just negative connotations. All the budget restricts how much we can spend. "Oh yeah, but I can't do that it's outside of my budget". Right. But it doesn't have to be that way.. All a budget is, and what it means is a plan of when and how you will spend money in your business to ensure that business can grow and you can still get paid.
The other reason we do a budget is to map out that growth. So, think of a business like this. You stood on an escalator, but you're facing the wrong way. The escalator is going down. You are facing up. Now, if you stand still, you're just going to go backwards.
You need to be able to map a clear way forward that creates a sudden shift of momentum so that you overcome that general backwards propelling that's going on. It's going to take an effort. If you do it halfheartedly, then you won't actually move anywhere. You'll just be staying still. And today it's going to take the same. It won't be easy. If it is then either you've done this before and you've really got it nailed and you've got it right and you are really great at it, or you aren't taking the time to think deeply enough and challenge yourself. The concept of budgeting is easy and it gets overlooked because it is that we think we can take shortcuts in life.
Often, we can. The people who really hit the high performing levels, they did the basics consistently well, and today, financial planning and budgeting is one of the basics. That people cut corners on; we're not going to cut the corners. So, I've got a great method that will take away some of the pain. But if you sat here thinking this is going to take some more thought, you're likely correct. It is going to take some real deep thinking.
We've got to get personal. I already said to you that a business is a tool in order for you to lead the life that you want. And yes, you may have this goal that you want to change customers lives. You've got this passion that you really want to achieve. But ultimately, the reason that you are here and the reason that you are running a business is to make money while you do not have to spend every single possible hour doing it. The truth is that's why you started your business, but how many of us have forgotten this? How many of us have ended up not being able to pay for ourselves or ended up working so many hours that we don't have time to do the things that we enjoy and we just get around it by going, "Yeah, but I enjoy business. I enjoy working on my business". But not all the time. And this is a big thing about how we operate. What are you actually trying to achieve as a person? You likely started this business to change your life, but to change your life for the better, not because you were underpaid and overworked. So, the first little bit of work that you need to be able to do is to set aside a few minutes, and just write down what you really want for you, the hours that you want to work, the time off and holidays that you want, the places that you want to go and see the things that you'd love to be able to afford.
And then what we're going to do is accelerate that forward and look at a second set of workings based of that. And it's outside the business that we're starting, and I know that's alien, I know that's not how normally our budget's done, but we're not here today to do something that is how it's normally done. I'm trying to get results. Now, don't worry, I'm not going to ask you guys to come on to various social media platforms and share any personal earning targets or anything. Right. It's personal and it's for you, but you need to get real and comfortable with talking about your personal targets. Even if it starts writing them down, talking about them to your loved ones and your close ones, but you've got to be honest with yourself.
There's also a chance that the first time you do this, you won't get it a hundred percent correct. Maybe at their first pass, you don't know or don't have all the info available, but that's okay. We are not looking for perfection. If you try and make it perfect, you are full short, and you'll want to cut corners.
You're going to do pass one and get it roughly where you want it to be, and then you may have to do some other passes to improve it and get a real solid financial plan. And yes, it takes work. The concept is easy, the effort not.
The second real work, though, is your personal household costs. Now if you look in the show notes, there'll be a link into where you can actually go and download a template for this. But I want you to work through understanding your personal household costs because we're going to use this to understand what income you need in order to survive and what income you need in order to thrive. And it's personal and individual to each and every one of us.
This is all about the business now. Business Income. Now again, we've got a template and it's in the show notes, so you'll be able to grab that and you'll be able to work on it. But there's a little bit of guidance, first of all, and those of you who have got repeating income models for your business. This task is just that little bit easier for you guys. Without those, what you don't know your customers at the start of the month, and you need to go out and find them and bring them in. This is a little bit more challenging. So, what we're going to do, we're going to start with your income, and we're then going to work everything else out off the back of that.
So, if you've got repeatable income, then what you need to do is start with your known repeatable income. Do you know based on what you've got from last month, what you're likely now to repeat this month, and that's your baseline. And then what you're going to do is remove your normal churn. So, if you normally lose five percent of those clients every month, then you need to account for that. That needs to go in the plan, cuz if you don't, you're going to miss your mark. Now you need to add to your growth from upgrades. Now, if you are not talking to your existing clients about how they can upgrade and buy more from you, that's a whole another podcast episode. But it's key. It's far easier to win business from the people who already know love and want to work with you than it is to go out and find new customers.
The other element is then what growth are you going to get from new customers? Now if you don't have that repeatable business model, then like I say, this is a bit more challenging. You need to start with the rough baseline. Now there's going to be some seasonality maybe brought in here, but this needs to be something that you can achieve with ease because you're going to work out everything from there.
Now you need to add to any reasonable growth you're likely to have because of the marketing activities that you could undertake. Don't go crazy. Don't get all like excited and go, of business sort of excitement. If you like business owners who think, "Yay, this is amazing. I can double the business every month". Like, be realistic. We're business owners. We think the impossible is possible, but just be reasonable. Set a stretch, but achievable target.
Cost of delivery. Now I only put a few things into cost of delivery. These are specific, what it takes you to deliver the services, the product that you have. So, there's only three areas that should go into this in my view, it's the products, it's the marketing, and it's the staff it takes to deliver what you do. That's it. I know there's arguments. You could put lots of other stuff in there, but in my view, these are the three. Right. They're heavily linked to the sales that you have. If you sell more products, you need to buy more products. In order to sell the chances are you need to do more marketing activity. In order to actually deliver, if you are a service-based business, in order to do more delivery of the stuff that you've sold, you need more delivery staff. Now, it might not be, you need the normal delivery staff every little item that you sell or every little service that you sell, but it might be at some point if you continue to sell a certain number of them, eventually you'll run out of staff and able to deliver them. Okay? This all needs to be considered against the income budget that you have already created.
We're onto the overheads. You're going to consider the general running costs of your business. Now, in an ideal situation, what you'd have now is your previous three months' bank statements, and you're going to go through them. With three colored highlighters, I recommend a green, a yellow, and a red, and you're going to classify each cost in your business into three categories. They are either essential or optional or unnecessary slash nice to have. That's it. That's the three. Now, be as brutal as you can with this, however. Nothing should make it into the unnecessary category that would affect the quality of the delivery of your services or products majorly or cause you considerably not to leave one of your business or your personal values.
Don't use that as a get out mind, right. This is about improving, not about getting away with it. Just think back to that quote from Keith Cunningham. That five to ten percent reduction in expenses could lead to a twenty to fifty percent improvement in profits. If you don't actually assess these and be critical, you're not going to find them because we all think we're running a super-efficient business. The reality is somewhere different.
Now, if you can't access the last three months' bank statements, note them down as a suggestion. That's another pass that you're going to need to do, then you need to work for memory. It's not ideal. You could even possibly go through your accounting records. If you've got them online in like zero, QuickBooks, anything like that, then you can go and access them there.
But this process is one of the most essential in building a budget. This is where the winds are made. And don't forget, this isn't about when things get paid. This is cruel accounting. You're going to use the payment triggers to figure out where things go, but actually, if you pay your insurance annually and in advance, then really it needs to be split over 12 months. Otherwise, you're just going to have one month's worth of insurance and then nothing for 12 months. We're not creating a cash flow forecast; we're creating a budget. At this stage in the overheads, do not include anything for your own pay.
We're going to do a bit of a sanity check. What we've built is we've built your budget for your income, you've got your costs of delivery, and you've got your overheads, or be it split into those three categories, the essential side, the optional side, and the unnecessary. But now you should have a profit figure. And we're going to take that profit figure that you've currently got at the moment, and we're going to compare that back to your personal household budget on which you should have your surviving income and your thriving income. Just note where you see it. Did you make your surviving income? Did you make your thriving income? Did you exceed all together? Did you just feel well? Just note it down. Be reflective. Know what it means. Maybe note down what you're feeling, if you didn't hit your surviving income. Is that a shock or is it just a reality check? Just note down how you're feeling at this moment and where you sit.
Game changer. Like I say, none of these things are necessarily hard. The concept is easy, but the element of the process is challenging because we don't want to do these basics. We don't probably want to know the answers really, but if you don't know the gap you are trying to fill, you can't fill it up.
You're either going to underfill or overfill. So, let's really understand the gap. Step 7 is the game changer. It's the budget for thriving success.
So, we've mapped out where you are currently, but now what we're going to do is we're going to take some time to look through your optional and your unnecessary overheads, and this is where you can identify opportunities for where you can cut back, where you can find that five to ten percent, that may well just add that twenty to fifty percent to your profits and put money in your pocket.
So, what you're going to do, you're going to go through your optional, and unnecessary overheads. Make sure you just haven't highlighted something and put in these to ease categories. That's going to cause you a massive issue with the quality or speed that you can deliver at, and end up offending, affecting the business in the long term.
If you now have got these optional unnecessary, and you now remove them, you are happy then no longer required, and now what you are left with is a new way of reflecting your business performance. Its income, less delivery costs, less essential overheads, gives you profit.
Now, what do you look like? Have you moved from where you were before? Are you still not hitting surviving income? Have you moved from surviving to thriving? Have you gone from just below thriving to exceeding, thriving? How do you now feel?
It's the reflection and the conclusion. Now remember I pointed out back at the start that this wouldn't be a hundred percent correct the first time, and hopefully what you highlighted from this task is that, to remember your company is there to help you first survive and then thrive.
It's good to separate business and personal money, but it's also expert thinking to be able to recognize that overspending in your business affects you, and your financial position. So, my top tips, right? Don't leave your budget as it is now. Put some time aside for next week to review this.
You're in need of an hour, maybe two. Note down what you didn't know today to make sure you've got all of that information ready. So, the next pass is an improvement on this one. We didn't aim for a hundred percent and we may not hit a hundred percent. But we want to make sure that next time we're making a big leap forward. And then once set, this budget shouldn't be locked away. The major power is in reviewing your performance against the budget. If you are new to this, then you may be out, but it's a learning process. Note how, where you're and know why, and then look to improve it for next time. Get somebody to be accountable to you to stop overs spending. You've put the tools in, you know you're unnecessary in your optional. Look for any trends or any methods within that to know where you've got a weakness and then make a rule that you need to email that somebody for permission to spend. Don't call, email, and this is why it's important. You have to be able to explain to that person why spending this money adds value. And the rule is that this person needs to take some time before they respond, and that's why phone calls don't work.
This isn't actually to get their permission. This is to slow down you're thinking and stop making rash decisions in your business that cause overspending. That means that you don't have enough money to be able to pay for yourself. This is about putting more money in your pocket.
Now is a breakthrough moment here. At the start of today's session. I said how you need to move yourself from, "I should do a budget and plan for financial success" to, "I must do a budget and plan for financial success". But through today's process, we've possibly highlighted how your business isn't achieving for you.
And one tool to change that is to review the optional and unnecessary overheads, and I've already given you that, but there's a second one and that sometimes it's easy to look to do sales and discounts that way you just get busy. But if you go and give a discount, then actually you'll end up cutting your profit. A ten percent discount when you make, let's say it's a hundred-pound item and you make thirty percent profit and you give a ten percent discount, 10 pounds, but that's actually 10 pounds out of 30 pounds profit. You've just cut your profit by a third.
So, a breakthrough happens in a moment, but the work to get takes time. But what other way, right? What if you charge ten percent more? If you went from 100 pounds to 110 pounds, that's 10 pounds of additional profit. You've gone from 30 pounds to 40 pounds. That's a big increase in terms of the profit that you are making Now, should you charge more? or must you charge more?
Just take this moment and absorb these statements. We must charge more, or I'm not going to be able to payroll. We must charge more because my health is suffering. We must charge more because my marriage is struggling, or we must charge more because I'm effectively earning minimum wage and what's the point? or we must charge more because I'm not seeing my kids until bedtime because I'm working so late and I can't afford to hire any help.
This needs to change and it needs to change now, and I speak from experience. I've been to all of these. Raising prices and charging more is scary. However, even more so is the life that you may well be putting up with and the pay that you are receiving for the conditions that you work in. Let this moment be the breakthrough. Take time and explore what a budget might look for you if you were brave and put yourself first, and you charge just that little bit more. And my final point is this, Abraham Lincoln said, "Discipline is choosing between what you want now and what you want the most". I need to take that with you, right.
Because what's going to happen is you're going to leave here with all these great intentions of how this great budget is going to change your business. It's going to change your life, but then distractions are going to happen, that's the reality. We're business owners. There will be distractions. There'll be fires to put out, there'll be things to fix. There'll be great more urgent tasks that need your attention right now.
But remember, what is it? Is it what you want now or is it what you want the most?
You need to schedule that time now into your diary and to get your budget nailed. If you think that's going to take three more passes, schedule in three more passes, because if you don't schedule it in now, then those distractions will appear. The more urgent tasks will appear, and you won't make the improvements, and you'll have another excuse because you can't do it. And why your business isn't working. So go away from today and be disciplined to do what you want the most.
