Start-up Income Statement Projections

You are a Champion!

Assume a Pro Forma Income Statement to project income and breakeven sales for the first year in the business and the following ratios for each $100 (average sales mix) Net Sales:

Pro Forma Income Statement	Dollars	%
Sales:
Gross Sales (Suggested Retail)	$166.67	166.7
Wholesale Discounts (40% Retail)	66.67	66.7
Net Sales (60% Retail)	$100.00	100.0
Variable Cost:
Product Costs (12% Retail)	$20.00	20.0
Distributor Commissions and Royalties:
Override Royalties (10.5% Retail)	17.50	17.5
Leadership Royalties (9.5% Retail)	15.83	15.8
Other Bonuses and Trips (4% Retail)	6.67	6.7
Commission Expense (24% Retail)	$40.00	40.0
Variable Expenses (36% Retail)	$60.00	60.0
Gross Margin (24% Retail)	$40.00	40.0

Since this Pro Forma reflects a Gross Margin of 40% we need to determine our breakeven sales.

Note: This is a simplified projection because some variable costs have been left out (like freight expense). However, we will assume that Freight Revenue covers the cost and this is our first high level projection.

We estimate that our fixed costs for the year will be $500,000 (salaries, benefits, rent, and other period costs).

In order to determine breakeven Net Sales we divide the $500,000 fixed costs by the 40% Gross Profit Margin and determine the breakeven sales to be $1,250,000 which can be tested as follows:

Net Sales	$1,250,000	100%
Product Costs	250,000	20%
Commission Expenses	500,000	40%
SG&A (Fixed Costs)	500,000	40%
Net Income (Breakeven)	$0	0%

Obviously, before we do a Balance Sheet and Cash Flow Projection we test the reasonableness of breakeven sales and fixed costs. Based on average sales per customer, and industry turnover, we can determine how many Distributors we need to recruit to hit our sales projections. These are very KEY PROJECTIONS! Once the company reaches the Net Sales figure the net profit goes to 40% (within a reasonable range of sales and fixed cost).

Many start-up companies will copy other company agreements including their commission breakage rules and annual fees. DON’T! For one thing, it cost more than most annual fees (studies have shown 5 times more) to get a new customer. Distributor turnover or new recruit fees normally takes care of most of the annual cash flow lost by not charging annual fees to ongoing customers.

As we’ve said in other articles we would be better off if the Suggested Retail Discount is 50% (instead of 40% in this projection) because of sales psychology. Use the maximum Distributor commission schedule to do initial projections to eliminate any possibility of understating commission expenses. Remember, commission expense is a percentage of net sales and you want the best you can afford to attract the top Distributors. Reputation and Character are your most valuable corporate assets (word gets around).

If you can get past Breakeven Net Sales you will attract Distributors that they can’t attract. The Keys to Network Marketing companies are:

• Net Sales
• Fixed Costs

NEVER DRAG NET SALES!

If you can attract recruits (and get past Breakeven Net Sales) you have accomplished your major start-up objectives!

Pricing

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Pricing is not a one man show and should have input from accountants, engineers, economists, statisticians, and marketers. Also, pricing requires significant judgment and is not just a computation as any small business person or entrepreneur would know.

Many small companies approach pricing from a cost accounting point of view where product prices are evaluated internally in relation to the margins (percentage of profit on sales). In other words, a target gross margin. If that target isn’t achieved those products are phased out or priced out of the market. Obviously, a product should at least cover out-of-pocket (variable) cost unless it’s an important loss leader to other profitable business. However, we will soon show that this is just half of the computation.

In many small businesses we would rarely see pricing based on investment returns (ROI) even though it is a long-run necessity. Unfortunately, many small businesses have faced the Wal-Mart experience and are no longer in business. Many undisciplined managers get wild hairs or out-of-body experiences at night that cause them to add unnecessary costs to the business. In other words, over time they are not even remotely the low cost producer. That’s why many new to a business start with a franchise because the business model is extremely structured and controls the amateur exuberance (things that don’t work).

Let’s look at the following simple example: I go out and spend $200,000 for a new truck which I assume will bring a good price on the market if I need to exit the business. Of course, I have all the costly insurance policies (trucking is a risky business) even though my operating costs are reasonable (I have a new rig).

Your experience in trucking tells you to buy a good used rig for $50,000 (you let me take the hit from driving a new rig off the lot) and you just happen to be a mechanic too. Also, you let your increased operating costs from running an older rig offset reductions in other expenses. You assume personally as much risk (self insurance) as possible because you have a great safety record.

From a P&L or income statement we both run 500,000 miles at $x per mile. In other words, we both make the same profit on the income statement. With just business experience and judgment only, who’s more profitable (ROI)?

Let’s look at another example:

• A 20% profit margin multiplied by one turnover equals 20% return on investment.
• A 10% profit margin multiplied by two turnovers equals the same (20%) return on investment.

Any questions?

Finding a Product To Sell

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Find just one type of product (hopefully high impact) and concentrate on how to market that product. First, consider areas of interest because you will just naturally do better (in my opinion) with something you can get excited about.

Why just one product? Because you need to focus (this is a beginning) and you can’t focus on a large group of products (unless that’s what you did working for someone else and you are just copying their business). For example, is the product seasonal? Who uses the product? Who are you competing against? That’s not just a product question. Different products compete like luxury cars compete against diamonds. How do they buy the product? Can this product be marketed (is it marketed) through Network Marketing? There are only so many hours in a day so limit your focus.

Next, look for the hungry person, or disgusted person or group, that would be willing to team with you to market the product. Why reinvent the wheel and do all the start-up work when someone else has already done it? Never do what you can accomplish by teaming up with others. I recall a brother-in-law who started a business (with another key person) just like the one they had worked for many years. Guess what, they were the business and their former employer no longer exists. Another person I know was devastated when he got fired in heavy haul trucking. He is now a millionaire with a heavy haul trucking company. He would never have accomplished this had he not been fired and that company has many regrets about their major firing decision–big mistake!

If you approach others and they are not interested (likely case) go find someone else who is and look for the best people you can find. No one does these things alone if they can find the right people. Also, it won’t be a major industry player until you are a significant player.

Finally, keep your eyes and ears open! If you have written goals then the information to achieve those goals gets through. Your brain filters out meaningless information but it doesn’t filter out important information in areas you have been giving a lot of thought (if you think that’s not true take this awareness test). If you are talking you can’t be listening.

It’s out there somewhere!

Competitive Advantage - HOW?

You are a Champion!

In previous articles I’ve discussed demographics to make sure our product or income opportunity is introduced to a large expanding market. I really get excited just thinking about the market changes (demographics) taking place. How would my start-up company approach this large expanding market?

Taking advantage of the market competition is a very different subject from being in an expanding market. Companies can be in great markets with great products and still go broke because they can’t effectively compete for customers.

Bill Gates is admired for his accomplishments but would it be wise for me to create a unique product (with large entry barriers) or a unique experience? Bill accomplished both tasks when he took on the formidable IBM as a competitor–that’s why he’s the second richest man in the world. I’ll bet Microsoft is currently wondering about other serious companies like Google, Apple, Sun (open source), etc. who have also created large entry barriers with a heavy investment of capital (eating away market). Just like Microsoft and Apple damaged the IBM main frame business the evolution goes on (ipods, iphones, etc.) so what other unique products are coming down the pike?

If you decided to open up a hamburger business across from a Big Mac location how would you go about it? Would you use the me too approach? Or, would you ask: “Who is my Customer?”Is your customer the mom on her way to get a quick meal for her kids at an established (trusted) franchise with a playground?

What is your product? Would you suspect that energy and rehydration drinks have some serious competition? Would you compete head-on with Gatorade and the deep pockets of PepsiCo Inc.? I suspect some would but I sure wouldn’t as a start-up.

And so, how do you compete against the Big Mac hamburger? Would you create the biggest fancy home made burger with melt in your mouth fries and a great social event for the evening (not a fast food business perhaps)?

And so, let’s ask other good questions: “What are you offering and how are you offering it?” Can people make an “emotional connection” to your products and/or opportunity? “How would you take advantage of customers that feel invisible (overlooked) in the market place?” “How would you take advantage of customers who feel ‘messed with’ and not too happy about it?” Since this is about Network Marketing would you consider people and relationships as a part of your customer experience (part of your product offering so-to-speak)?

We’ve talked about who (your core customer), and what (your product), and now it’s time to talk about how.

HOW (Help Others Win)

Word-of-mouth Network Marketer’s can talk about form, taste, convenience, opportunity, etc. Why do Network Marketer’s get paid? Because they are the how. Just try starting a new product and putting it on the store shelf without word-of-mouth, advertising, etc. That’s why large mass marketers (deep pockets) have large advertising budgets! Do you want to compete with deep pockets? Network Marketer’s get paid after you get paid (not before like advertising). Even if you could get the shelf space, how would you like your “me too” rehydrate setting on the store shelf next to Gatorade? Could be a very expensive distribution proposition with low sales volume.

Please review the 4 Steps to Success because this needs to be trained to Business Builders so that they can build their companies in various locations across the globe. The competitive advantage of a Network Marketing Company is their social network created by business builders. Some might call this the religiosity factor of network marketing (the same way churches are built) but it is really just connecting with people. From experience, some of our most beneficial business relationships (meetings, trade shows, etc.) has come from crossline relationships or no direct financial relationship. These relationships build a company! Relationships intertwine like a rope creating the strength of the organization. Without this social network many distributors are building alone and this makes building more difficult. Healthy dynamic relationships are the life blood of a network marketing company and unhealthy relationships are just like cancer to the body.

Let’s talk about the social events to overcome seasonality. Many products and businesses are seasonal. Some businesses are geared to the Christmas season. Some businesses are geared to the weight management season (gyms and trainers). How do you compete in off season? By creating promotional events, festival events, and social events. If you don’t have a 4th of July celebration you need to be working on one now. If you start a Network Marketing company take advantage of every Holiday Season (not exactly on H-day) and even create some of your own H-days. This is a people business (so don’t forget the 98% who just purchase your products).

Lack of social events and communication are the major reasons people stop doing Network Marketing. When your upline, your crossline, your prospects, and your downline stop showing up at “rare events” what are you going to do now?

HOW (Help Others Win)

If your customers aren’t winning you aren’t winning

“Motivation is temporary–but so are bathing and eating. It just turns out that if you do them every day you will live longer and smell better in the process!” Zig Ziglar.

And so, if you want your network marketing company to stink and die an untimely death just give up on impending events (stop feeding it, giving it baths, and try living off the past success).

This is not a “me too” business. PepsiCo Inc. is not your major competition. Your brand, products, and prices are not the only drivers. HOW about a unique experience for your customers (word-of-mouth Business Builders)?

Product Development

You are a Champion!

Products will need to be developed by the management team member(s) with that experience and normally through alliances with suppliers.

Here’s where my manufacturing and costing background experience takes me:

• A very few high impact products or brands correctly priced and marketed.
• A very simple inventory.

Your business can get more complicated as it grows and matures by adding the right key people.

Any serious manufacturer of products knows all about the high cost of inventory imbalance. Unless you have experienced purchasing, production and inventory control people (APICS certified) I strongly suggest you don’t start with manufacturing your own products or do so on a very limited scale.

Why? Dr. Joseph Orlicky with IBM many years ago started developing MRP computer systems to handle the manufacturing environment because of simple probability theory. “If the probability of having one item in stock at a time of need is 90 percent, two related items needed simultaneously will have a combined probability of only 81 percent (0.9 x 0.9 =0.81).” In other words, without a proper inventory control system not having continual shortages quickly becomes a fluke. Many companies compensate for this probability (fluke) by over stocking (dead inventory) and high spoilage ratios–not good! Manufacturing is the most complicated business in the world and not recommended for the inexperienced startup!

A couple of stories will drive home some other key points.

As the Controller of a heavy manufacturing company I was asked to review the profitability of a startup company financed by family members of the principal stockholder. This startup company had a wonderful product idea (created by a smart engineer). Unfortunately, they had been in business for some time and were beginning to question the “cash drain” of building the product and began to wonder how profitable the company would be. Folks, this is not the time to be figuring that out and it’s very simple to do (only took me one afternoon reviewing their books).

Take the sales invoices of key products and determine the unit sales price on the products. Next, take the major costs (estimated costs) of the units from material purchase invoices (usage times cost per unit) to determine the estimated gross profit per unit. I quickly found that the sales price didn’t even cover the variable cost let alone the fixed cost (no possibility to ever make money). I prepared a report to the owners and the very next week the CEO inventor of the product left town in the middle of the night not to be heard from again. If you think this story is not typical it’s because you haven’t been in the business world too long. Do your homework first and not after things don’t look right! Sure, people can overdo the planning stage but this real story wasn’t funny to the investors.

Brilliant ideas are a dime a dozen as the old cliché goes.

You think Bill Gates is the richest man in the world? According to Fortune it’s Carlos Slim the son of a Mexico City shopkeeper (worth 59 billion). “Periodically the elder Slim would round up his three teenage sons for an economics lesson. Sitting them down in the living room of the family home, Slim would produce a single handwritten list. One line would show, for instance, how a Mexican insurance company was selling for far less than a similar American insurer. Another would show that compared with European candy or cigarette makers, Mexican manufacturers were drastically undervalued.” Obviously, there is opportunity in a country that many Americans would classify as third world.

Opportunities are everywhere but they don’t often come from high tech inventions. They come from “knocking off” products and companies that are undervalued or not properly marketed. In my opinion, knowing the value of something is a lot more important than your latest brilliant idea!

Here is the link to a brilliant idea company in the industry I follow and while I think they are a smart group of people I wish them the best of luck (Gatorade Vs. Enlyten: Sports Strip Battle Moves To Court).

Compensation Plan Design

You are a Champion!

We talked a little bit about building a Team in our last article but now we will talk about the most important part of a Network Marketing Company—the Compensation Plan. The design of this plan is more important than your products, management team, and board of directors or medical board, etc. Why? Network Marketing Companies have to attract strong leaders to their company by giving the Distributors a great plan that is absolutely the greatest.

Think about this for a moment…your company is a Network Marketing or multi-level pay company. By definition, you have given up other forms of marketing and distribution systems to implement this particular business model. If you are going to implement this business model it requires a great multi-level compensation plan to attract the best Business Builders in the Industry. Some of these people are looking for a fast buck but most of them are looking for residual (passive) income. Income they earn after they quit doing the business. Net Sales Growth is absolutely and positively the most important part of your business and if you can get it done better through a different business model then “go for it.”

Well, of course the products and science behind the products are the most important part and not the compensation plan—right? No! I don’t have to “sell” the quality products I use in order to receive their benefit and get the maximum discount (you can ask any experienced Distributor how). If I can make more money pushing XYZ why would I be pushing the quality product I buy? I might use them but why would I actively and aggressively sell them if I couldn’t make a good living doing so?

What does the compensation plan say about my Network Marketing Company? Hopefully, not Ho-hum but this is the best and greatest plan I’ve ever seen!

A big part of my business experience has been around engineers and their egos cause them to fall into a trap so, so often. We build the “best” product on the market for a fair price so why can’t you sell the products Mr./Ms. Salesperson? Because the customers don’t know about or don’t want your products! You designed them Mr./Ms. Engineer—they didn’t! How do we bridge that gap?

If I know about and like your products I may use them but it doesn’t mean that I will tell family, friends, and neighbors about them—ever! In fact, I remember well a customer who was getting great results on the products we sell but he wanted people to think he was getting the results through exercising (not taking great nutrition). He never, never, ever told anyone and would deny it if you suggested it was the products that helped him get good results. He kept the secret to himself!

How do I design the compensation plan? Take a tried (through the courts) and true plan and make it simpler and better.

What about overpaying the distributors and going broke? That’s why you take a plan designed by someone else that’s been around for years. No matter what you pay in compensation it will always be just a percentage of Net Sales.

If you will review industry statements you will quickly see that most Network Marketing companies have great margins and the key to profitability is simply Net Sales. Remember: “Retail Prices” are “almost” meaningless (see other articles on discounts) so how do I get the Distributors to rapidly grow the company?

THIS COMPENSATION PLAN DESIGN IS YOUR NO. 1 OBJECTIVE AND IF YOU DON’T UNDERSTAND THIS YOU WILL NEVER MAKE IT IN A NETWORK MARKETING COMPANY SO DON’T EVEN START!

A Beginning CEO…Startup Company

You are a Champion!

This section (MLM Startup) gives tips on how to start an MLM company (not how to run a successful Distributorship) for those who have the desire to build a successful MLM company. Hopefully you can avoid some common pitfalls in starting a company because the majority of startup companies will fail. Just remember, some will defy the odds and that is the reason for this section of my blog. I hope to write a host of articles for this section.

CPA’s will tell you, through experience and published statistics, that most companies fail because they are under capitalized. However, there are ways to find capital if the business plan is sound. Often, rapid growth kills many businesses because people underestimate how much cash it will take to run a business. Maintaining positive cash flow is a very key element to success and nothing will eat up cash faster than uncontrolled growth. Therefore, even wild success can create failure for the unknowing entrepreneur.

In my opinion, most companies fail because they don’t have the right management team or leaders in place and haven’t correctly defined their own position in the organization. As Clint Eastwood said, “A man has to understand his limitations.” Your understanding of self will have a great deal to do with your success. Building the right team begins with understanding your own skills and going from that point to build a strong team. In my organization the Lone Ranger or Superman need not apply.

Often, startup companies get the reputation for only being built around strong dominant personalities that carry the load for the new company. People like Bill Gates and Steve Jobs come to our mind and we will readily admit that companies have stages and many large companies have different management teams for different stages of development (startup, growth, maturity, and death). Often, a strong entrepreneur can’t take the company successfully into the maturity stage because they may lack management skills or key people. Recognition of this fact is not a fault in the individual because often a later stage management team doesn’t have the skills to get a startup business off of the ground (they may hire experienced people to do that for them). They may have the management skills to run a large organization, and (since one of my degrees is in Business Management) I will just tell you upfront–this section is not at all about that broad body of knowledge! Also, I am a CPA but this section is not about accounting and taxes! It’s about MLM startups and not about buying a business or the finer points of how to manage a large business.

So you are not a Charismatic Leader? It’s very good that you recognize that fact upfront so that you don’t waste your time trying to turn yourself into one and get on to the task of building a business or get out of the way of the Organization Structure! I’m not saying that being Charismatic is not a worthy goal–life is short.

There’s a real advantage to realizing that Charismatic Leaders will be drawn to your MLM organization if it’s developed properly. In other words, have you carefully designed your fishing bait (Compensation Plan)! Yes, strong leaders who understand first hand how to build a large Distributor organization will be key to your MLM business. However, that is not the job of the CEO (assuming you will be the CEO). Please note: “Even if you have those leadership skills that’s not your job as the CEO, and you won’t have the time to make that your job if you are doing your job as CEO!”

Startups have the advantage of starting fresh with the management team. Generally, when new top management is installed in an existing company the jobs of “all” the existing management will be in jeopardy over time and this can be very disruptive to an organization (tearing down before beginning to build up).

This is a Key question: “What is the top management structure?” Peter Drucker: “Top-management work is work for a team rather than for one man. It is quite unlikely that any one man will, in his own person, unite the divergent temperaments which the job requires. Moreover, it will be found, when the top-management tasks are analyzed, that there is more work to be done than any one man can do…To recognize the team nature of the top-management job is particularly important in the small business. The one-man top management is a major reason why businesses fail to grow.”

Also, your company will need a functioning board of directors. Peter Drucker, the “Three Functions of the Board:

1. The enterprise, first, does need a review organ. It needs a group of experienced people, people of integrity and stature, people of proven performance capacity and proven willingness to work, who counsel, advise, and deliberate with top management.
2. An effective and functioning board is needed to remove a top management that fails to perform.
3. Finally, the enterprise needs a ‘public and community relations’ organ.”

Developing a good Team will be time well spent towards avoiding management by crisis.