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Archives for April 2013

How to Create Sales Projections for a Subcontractor

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I recently had a subcontractor who was using ProjectionHub reach out to ask how to structure their sales projections and cost of goods sold.  This contractor installed different types of flooring in residential homes and commercial buildings.  The challenge for this type of sales projection is that 1 contract really  has two distinct types of sales.  There is the sale of product which is the flooring material, and the service sale which is the billable hours for the project.  So now I am just going to walk you through an example step by step for both the cost of goods sold and the sales projections for this type of business.

Step #1 – Structuring Sales Projections

Once you create an account at ProjectionHub one of the first screens you will come to is setting up your sales projection structure.  You will see 3 questions:

  1. How would you like to project sales for products and services?  I would choose “Project sales for each individual product or service”
  2. How many years of projections would you like to create?  Obviously this is up to you.
  3. What do you sell?  You will need to choose  “Products and Services”

This last question can be tricky because many subcontractors might think they are only selling a service, but often times you are selling a product too.  You probably bill the client for the materials you use (which is a product) plus the labor hours for the project (which is a service).

Step #2 – Adding Product and Service Projections

Now I am just going to enter in one example of a product and service.  Let’s say you install tile flooring and for this particular tile you charge $2 per square foot for the materials.  So you would enter in Tile Flooring as a product in ProjectionHub.

You will notice that I entered $2.00 for the price per unit.  We are going to assume that 1 square foot is our sales unit.  Then you can see in the Sales Assumptions text box that I typed out what I am assuming we will sell each month of this particular product.  I took the easy way out here since it is just an example and said that we would sell 5,000 units each month.  If you can come up with better, data-driven assumptions that will improve your projections.  But once you hit submit on this pop up box  you will then need to enter in 5000 for each month 1 through 12 because it asks you how many units you plan to sell each month.

Now you can enter as many types of products as you want here.  If you install 10 different types of flooring, I would suggest entering all of them and estimating how much of each product you anticipate installing each month.

Now you need to enter in the service portion of your Tile sales.  You will need to build your projections based on billable hours.  So for example, maybe it takes you 1 hour to install 100 square feet of Tile.  So in order to determine how many billable hours you will have each month you simply take your 5,000 square feet of tile sold and divide by 100 square feet installed per hour to come up with how many hours it will take you to install that month.

In this example you will have 50 billable hours each month for your 5,000 square feet of installation work.

Now let’s assume you bill the client $50 per hour for installation.

Now you just need to enter in 50 for the number of billable hours you will sell each month for Tile Installation.

You are done with sales projections for this product and service combination.  Now you will just need to do this for each product or service combination.

Step #3 – Cost of Goods Sold for a Subcontractor

Now we move on to cost of goods sold for this product and service.

In this example we have 1 product and one service that we need to enter in cost of goods sold for.

For the tile itself you are charging the client $2 per square foot and let’s assume that it costs you $1 per square foot.  So you won’t have any direct labor cost for the tile itself, but you will have material cost of $1 which you can see entered in above.

Then for the service portion we charge the client $50 per hour of labor, and you pay your employees $12 per hour, so you will enter in $12 for the direct labor cost per hour.  In this example I am just going to assume that you don’t have any other material costs for the installation, but you might have another 10 cents per square foot related to the adhesive that you use to install the tile.

You are all set!  Now you just need to move on to your general expenses for the business like phone, internet, supplies, etc.

Feel free to email me with questions at adam@projectionhub.com

How to Create Financial Projections for Crowdfunding

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Although the rules for equity crowdfunding for non accredited investors still have not been established by the SEC, there may be some expectation, for business owners attempting to raise capital through crowdfunding, to provide some level of financial projections for potential investors.  The Jumpstart Our Business Startups Act opens up a new world of potential funding sources for small businesses and early stage companies.  The Act already outlines certain financial statement requirements based on the amount of investment you are looking to raise, but it does not appear to specifically outline requirements for financial projections or forecasts for a company.

I intend to update this blog post as new rules are released from the SEC, but for now I am going to speculate on a few things, and outline how I believe you should develop your financial projections for your crowdfunding campaign.

Basic Financial Projection Structure

First I think your projections should have the following characteristics:

  • 3 years
  • Monthly projections with annual summary sheet
  • Balance Sheet
  • Profit & Loss
  • Cash Flow Projections
  • Assumptions that demonstrate how you came up with projections

If you provide this level of detail, my guess is that you will be far ahead of the game.

Now let me show you with ProjectionHub exactly how I would create projections for three potential crowdfunding structures.

  • Equity – this is where you actually give up a portion of the ownership of your company to the crowd
  • Revenue Share – this structure allows you to keep ownership of the company and instead you pay a royalty on each sale back to the crowd until they have received the agreed upon return on investment
  • Loan –  this structure allows you to keep ownership and will have set repayment terms

 Step #1

First I am going to start by going to www.projectionhub.com and creating financial projections for an existing business.

Step #2

Now it is time to start setting up your sales projections.  I am going to assume that I am selling a consumer product, and I want 3 years of projections.  First you will be asked to name the product, enter the price, your sales assumptions which should be based on data when possible, and how many days does it take  you to get paid by your customers.

Step #3

Now you will enter the number of units of this product you expect to sell each month for the next 36 months.  Again, potential investors want to know that your sales projections are based on data and realistic sales assumptions.  So in this example I am going to assume that we raise the funds in month 3 and we see an immediate 25% increase in sales.  Then I am going to keep in mind the seasonality of our consumer product business, so we will see higher sales during the last three months of each calendar year.

Step #4

Once you have entered in your sales projections it is time to enter in your Cost of Goods Sold.  This can be somewhat tricky depending on which type of crowdfunding you are raising.  If you are doing a revenue share structure, then you should put the royalty amount that goes back to your investors on each unit in one of the Cost of Goods Sold options.  So for this example, I am assuming that our consumer product price is $75 per unit, and we have an agreement with investors that requires us to pay 7% of each sale back to investors until they make their money back plus a given return.

7% of $75 is $5.25 per unit.  I am also assuming that the direct labor cost per unit is $3 and the direct material cost per unit is $5.  I am going to add the royalty to investors in with the material costs per unit since there is not a royalty per unit option.

Step #5

Next you will need to enter in your monthly expenses for the next 36 months.  If most of your expenses are monthly, quarterly, or annual, hopefully this will be a quick section to complete.

Step#6

Now it is time to enter in your funding that you expect to raise from the crowd.

Step #7

Now you can enter in other assets that you have already purchased or will purchase like equipment, furniture, land, or buildings, and then enter in your current balances for your existing balance sheet.

Step #8

Download and customize your financial projections.  Once you are done you will be able to download an Excel file with your 3 year financial projections which you can then customize.

You can purchase our template here

How to Start a PROFITABLE Social Network

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Seems relatively easy to start a social network doesn’t it?  Get a bunch of users on your network and then slap some ads up on the site and let the profits roll in right?  I mean that is what Facebook did right?

I recently read an article by Lili Balfour published on the Huffington Post that said it took Facebook six years and $280 million dollars to reach profitability.  And Facebook is by far the most successful social network of all time right?

So how does one start a social network these days, and how can you reach profitability before burning through over a quarter billion dollars?

I think there are 3 keys to starting a social network that has the potential to reach profitability:

1.  Choose a Niche – It is going to be very, very difficult to displace a Facebook or a Google or a Twitter, so you may as well forget looking to have mass market appeal, and go after a niche market instead.  Here is an article with 7 successful, targeted social networks that have found success without the need to reach half a billion people.  There are many niche social networks that are developed that never get traction, but it certainly can help improve your chances of success.

2.  Passion – Obviously you need to have a passion for the topic you are developing a social network around, but more importantly many others must be passionate as well.  Again, if you look at the 7 examples from the aforementioned HubSpot article, many are built around causes or topics that people are passionate about including:

  • “Going Green”
  • “Being a Mom”
  • “Athletes/Exercise”

Social networks seem to work best when there is a core group that is passionate about the topic at hand.

3.  Early Revenue – Finally, I believe it is important to generate revenue early in almost every circumstance.  If you watched the movie “The Social Network”  you will remember the battle between Mark Zuckerberg and his partner over advertising.  Mark wanted to focus solely on growing the number of users and worrying about revenue later, while his partner wanted to start advertising early.  In the case of Facebook, it was best to focus on user growth, but Facebook is the exception, not the rule.  Your startup social network is not going to be the next Facebook, and you are not going to be able to raise hundreds of millions of dollars to fund your growth before you start generating meaningful revenue.  So I encourage you to start working on generating revenue sooner rather than later.  This will help you to fund growth, and it should help you secure additional investment to grow the business.

At the end of the day it is not impossible to create a profitable social network, but it is hard.  Do you know of any other examples of social network startups that are niche-focused, have a passionate user base, and actually have a meaningful way to generate revenue?  Leave some examples in the comments section below.

Why Small Businesses Won’t Need Bank Loans in 2020

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I am the Director of an SBA microloan program in the midwest, and I can honestly say that I am not sure if small businesses will even need a local bank to secure a business loan in 2020.  As a microlender we are working with small business owners who have been denied by a traditional bank, or simply don’t qualify for a bank loan because their loan request is too small for the bank to make any profit on the loan.  

Our goal with the microloan program is to graduate our borrowers to traditional finance, but in nearly three years of running this program I have not had one of our 50 some clients graduate to a traditional bank.  These businesses are actually growing just fine without a bank loan.  Of course it would be nice to have a line of credit, and they could grow faster with a larger business loan, but they are surviving and many are thriving.

For many of my clients I am starting to suggest alternative financing options like:

With the explosive growth many of these companies have already seen, or are poised to see in the near future, I am convinced that the traditional bank is in a lot of trouble when it comes to small businesses.  Here are 2 key reasons that I think the traditional bank won’t be a financing option for small businesses in just 7 short years.

1.  Overhead – First of all, the banks have built and leased building after building in order to get a physical presence in their market.  The problem is the average small business does not believe their local banker will lend to them, so they go straight to Google to look for financing options.  Now the local bank can try to advertise on Google in the competitive small business lending category, but now they are competing with alternative, internet based lenders who do not have the overhead associated with all of the office space required by traditional banks.  New lenders don’t have to worry about a vault, security systems in the building, utilities, mowing the grass in the summer, removing snow in the winter, etc, etc.  In a world where you can move money around with a click of a button, it is only a matter of time before these highly efficient alternative lenders will be able to completely dominate the traditional banks because their cost structure is so much lower.  This is the exact same story that is playing out in the retail world.  Amazon.com is crushing the competition because they can offer lower prices, online lenders will be able to do this soon, if not already.

2.  Technology Cuts Out the Middle Man – A bank is just a middle man.  The bank takes your deposits and then uses those deposits to lend to credit worthy projects that will keep your money safe and earn a positive return.  The banks are profiting from your deposits and what do you get to see from it?  .01% interest in your savings account?  This can’t last forever.  Depositors are going to demand more from banks, but because of their cost structure the banks won’t be able to offer competitive rates when compared to other options like Prosper.com and LendingClub.com which are peer to peer lenders.  These peer to peer lenders cut out the middle man, or at least much of the overhead associated with the middle man.  You can lend directly to individual borrowers or you can invest small amounts of money into many different borrowers and earn a return on your investment.  The platform will take a fee, but at least you will earn some return on your deposits.  Now I understand that peer to peer lenders are not FDIC insured, and you investment may not be liquid, but I think over the next seven years these platforms will improve and offer certain levels of insurance and liquidity to directly compete for your deposits.

At the end of the day, I think the traditional banking system could be in a lot of trouble if they do not innovate.  The problem is that regulations make it incredibly hard for banks to innovate, which could ultimately lead to their slow death.  What do you think?  Will small businesses even need the traditional bank in 2020?