Although not the most exciting subject – okay, way down the list of exciting subjects – understanding the difference between fixed costs and variable costs is actually quite important when budgeting your business and deciding what to charge for your services. I know there are many great resources out there from accountants and other financial experts with more detailed definitions and articles in regards to the difference between the two, but I thought covering the basics and stressing the importance would be helpful as wedding season kicks into full gear.
A fixed cost is anything your business pays for that is independent of the number of bookings you have. An easy example would be rent, since you pay the same amount for rent whether you have no bookings or 1000 bookings. Thus, when budgeting, you divide your fixed costs into the expected number of bookings. For example, if the rent on your business location is $1500 per month and you expect to have 15 bookings per month, the cost per booking for rent is $100. Other standard examples of fixed costs are equipment, utilities, and business fees (e.g. licenses).
A variable cost, on the other hand, is anything your business pays for that is purchased for a specific booking. An example for a florist would be the flowers specific to a certain couple. Other standard examples would be the food bought by a caterer for one particular event, or the Sand Ceremony kit bought by an Officiant for a specific ceremony, or staff paid by you to help on that one wedding.
Of course, because things can’t be too simple, there are some costs that in true accounting terms, and in much larger businesses than most of ours, can be either one or the other, or both, such as marketing dollars. If you have an accountant, you can always ask, and if no accountant, my personal recommendation is to put marketing and other costs you are not sure of into fixed costs and divide out over the number of bookings. The important thing to understand is that in service businesses such as ours, having an accurate idea of your expected cost per booking is very critical because: it allows you to decide how much you need to charge for your services, gives you an idea of how much you can discount (if you discount), and allows you to better value everything you purchase or sign up for in the running of your business.
The first year of business is usually the toughest, especially when it comes to service businesses like ours. As we know, your newly-created business is usually competing with many others who are doing the same thing, and their businesses have been doing it longer. This is one of the many reasons we recommend that your new business have a business plan, and that one of the sections in that business plan covers the expected financials of your business.
The financial section should include a startup budget (money you are going to spend to get your business launched), yearly profit and loss statement for year 1, 2, and 3 (what you are going to make vs. what you are going to spend), and a bit of the explanation of the logic you used to come up with the numbers. When creating and managing your financials, below are a four simple pieces of advice.
1) Create three budgets: a very conservative one, a middle ground one, and the one you are shooting for, and then make sure you are comfortable if you only end up with the conservative one.
2) Make sure you have enough money to not only get your business started, but to get you through the first 6 to 12 months of business. A financial cushion covers you for a slow business start, allows for you to stick to your plan, and can help with unexpected costs.
3) Talk to others who are doing what you are doing, with relatively the same ideal clients, and see what their first year was like. They might not share actual financials with you, but having an ideal of number of clients, expenses, etc. can help you prepare a realistic budget.
4) Understand that your financials need to be watched and updated as you progress. Your budget should be compared to your actuals each month so that you have an idea of how you are doing and are able to make adjustments to future your projections as needed.
Similar to other sections in your business plan, the financials do not have to be formally written out – there’s no need to pull out the accounting books – but they should be well thought through and as accurate as possible. We are all in business to make money, and having a good understanding of how much, and when, can help you properly plan other pieces of your business and make your business – and therefore your life – less stressful.
For most of us who are solopreneurs or very small business owners, the idea of writing a business plan can seem useless and/or daunting. Maybe you have thought… Why should I write one, I already know I want to do it and so I am just going to do it? Or, I don’t need a business plan, I am not trying to get a loan. Or, maybe even, I didn’t write one when I started my business, why should I write one now? Well, let me just say, a business plan helps you define what you are creating, where you want to take it, how you are going to get there, and what it is going to take, and cost, in the process… all very important to know when starting and when running a business.
I am not saying you can’t be successful without a business plan or that your business plan must be 300 pages filled with every business detail… but trust me when I say that it can help in so many ways – and done at any stage in your business – and below are just a few.
1) By looking at the long-term and detailing out the why you are doing this business, the who do you want as your customers, and where do you want the business to go in the long term, you will make it much easier to write yearly goals and the yearly action items to support those goals. You will also make it much easier to evaluate your business as it grows and therefore to adjust as necessary.
2) Writing a business plan makes you “sweat” the details. By writing out who you think your ideal customers will be, how you plan to deliver your product or service, and how you plan to market it, you get a better handle on what you will need to start and what it will take to continue. For example, when you start listing the things you will need daily just to operate your business, you have a much better idea of how much startup money you should have, how many bookings or clients you will need, and what you will need to charge.
3) A well-thought-through business plan can give you a good idea of your odds for success. By detailing out what it will take, what it should cost, and how much you should make, a business plan can help you determine if your business could be successful – in whatever way you are defining success. And, as you create the plan, if you don’t see the potential for the success you are looking to achieve, you can alter the plan or realize it may not work before committing too much time and capital.
So, remember that assuming you are not trying to get a loan, your business plan does not need to be formal, it just needs to be well thought through and documented. And, your business plan is, and should be, flexible, since what you are aiming for when you start the business may change as your business succeeds and matures. If you don’t know where to begin on it,
If you don’t know where to begin on it, drop me an email to email@example.com, and I’ll send over my “Nice and Simple Business Plan” template structure. It’s easier than you think to do, and important to take the time to think these things through!