5 Tips to set a true-cost operating budget for your start-up.

Most lenders, investors and even grantors require some sort of business plan when considering whether to invest in a start-up. One of the first things they look at is your cost of doing business projections. If they find that part lacking, they seldom look further.

  

When I'm working on a business plan for a new enterprise, whether nonprofit or for-profit, most of the initial budgets I see fail to include some fairly non-negotiable costs. Here are some areas to consider.

1. Government-required payments

Almost without fail, one area that trips up a lot of new business owners is the amount they have to include for what I call government and legal compliance costs.

Some people do include the FICA costs, i.e. the 7.53% of payroll that the employer must remit to the Feds, but fail to include costs for state and Federal unemployment assessments, workman's compensation premium payments, local taxes and licensing, liability insurance, and any professional association fees or licenses that are beneficial to or required for the business. Also, new costs associated with new laws like the ACA many factor in as well.

2. Advertising and marketing

Another often under-estimated cost is advertising. There is a prevailing attitude that everything can be done online, and it's free. No matter how wide-ranging your business plans are, all businesses have a local component, and this is particularly true for nonprofits or small retailers.

Revving up local interest can be expensive.

Websites and domains cost money. One of the popular web hosting sites that advertises ".99 cent" websites has initial start-up costs for the domain and the initial website hosting starting at around $75.00/yr for a completely static site. Add any sort of customer interaction (blog, email sign-up, mobile friendly,  etc) , and the price can triple.

As great as it is, the internet isn't a foolproof business growth tool. Running a few spots on the radio, a 15-second spot during your local news program, or utilizing any other form of "traditional" advertising avenues may be necessary just to drive traffic to your site or social media page.

3. Legal or professional costs

Sure, you may be able to get some sort of generic business document template and file it for a few dollars, but that's just the start. All states have specific documents, i.e. non-discrimination clauses, by-laws, and a multitude of other things that you may need the help of an attorney or other professional to complete or at least explain.

4. Wages

Believe it or not, you won't be able to "do it all" for very long. Even nonprofits usually find themselves at the point of needing at least one employee that they can count on being where they are supposed to be when they're supposed to be there.

5. Daily expenses

Things like utilities, phones, office supplies and equipment aren't free. Even donated equipment has to be maintained and replaced when it breaks. Having an allowance for these items is not optional.

Almost without exception, when I am working on a business plan for a client I find that they need to increase their annual cost projections by 25-40%, and that naturally affects the amount of revenue they need to break even as well.

Are your cost projections reasonable?  If you'd like a review, drop me a line at rightwords@ida.net and we can discuss them. 

Are you over-connected and under-noticed?

There comes a point in every business where you simply hit a development wall. Nonprofits are no different.

In many ways, the internet connectivity we all prize (or maybe despise!) contributes to that sudden stop.

The internet of today is a cacophony of digitized noise. Try following a few Twitter feeds and see how much real thought goes into them and measure how much value you are getting from them.

   

In the rush to have the most likes, followers, retweets or comments it's easy to lose sight of the real purpose of all those connections.

In a business sense, connections are supposed to be about interactive communications that provide value for both sides.

Take a look at your own favorite sites. What keeps you clicking on them?

Is it just to kill time?  To keep score to see how many of your own comments are being commented on?  To have some sort of social life?  Because everyone else is doing it?

If your connectivity isn't producing value, why are you still doing it?

Case in point. I recently reconnected with a person I had known fairly well at one time; not a BFF exactly but we had a pretty close acquaintanceship until she moved away. This was a while ago…before Twitter even existed.

I ran into her at the grocery store, and while we were trying to do the whole catching up thing, she never took her eyes completely off her phone. Twitter was scrolling the whole time. At one point she did mention she was looking for work, but when I asked for particulars, she was busy re-tweeting something and didn't answer.

It didn't take very long for me to see that our face-to-face meeting was only occupying about 10% of her attention, and I did the "well, it was nice to see you…call me sometime" thing.

That's sort of what happens when you focus on just one outreach strategy. You get so busy trying to build a broad audience, you forget that you need to develop real focused relationships.

For instance, let's say one of your grantor targets or a major donor prospect doesn't accept LOI's and you have no contacts in common. Think about something you have or can create, like a white paper or case study that has value to them. Drop them an email and offer it to them, no strings attached.

 Your email might read like this:

I noticed that you are seeking information on X.  I (we) have a case study on X that may help you.  I (we) would be happy to forward it if you are interested."

All of a sudden you are connected. Will that always result in an invitation to apply for that $100K grant or a $1 million endowment? Maybe, maybe not. The purpose is to get on their radar, but by offering something of value, there is an upside for them to notice and contact you.

It gives you a chance to present your organization, prove that you have value to add to their mission, and gives you an excuse to connect again to get feedback on the offering.

This works. One nonprofit that tried this strategy received program funding for three years as a result of this kind of outreach.

     

If you don't have any material that you can offer, it could be time and money well spent to develop a case study, white paper, manual or other outreach material that goes beyond the typical brochure, tweet or Facebook posting.

If you or someone you know would like more information on implementing this strategy, give me a shout at rightwords@ida.net.

Should you be on YouTube?

I get a lot of questions about just using YouTube for marketing, from both for-profits and nonprofits.  The general consensus seems to be "everybody's doing it."

Yeah, they are…and they shouldn't all be on there.

Some things lend themselves very well to visual media.  Some things don't.

In general, my own personal take is that if you are trying to impart  static information, like an annual report or even something like an instruction manual, you might be better off not putting it on video.

If what you are saying needs visuals, then sure, go ahead and use it

But by all means, if you aren't going to do the video well, don't do it at all.

Case in point.  I wanted to find out more about a business, but the only place they were out there was on YouTube. The video was basically just "Boy are we wonderful". I, on the other hand wanted to know if they worked on  transmissions. Nowhere in the whole darn video did it tell me what services they provided.

They weren't in any phone book on or offline, and the Google Map was out of date.

The phone number given was disconnected. They didn't have a website. Probably out of business, right?

Well, I was sitting there looking at the place, so probably not. Since it was Sunday they were closed, but definitely still there.

And of course, there was the website that had a help button, but it went directly to YouTube, where there was no help at all. Oh, there was a long six-minute convoluted video with background music that drowned out the speaker, but help…not so much.  The information I needed I got from an unrelated site, in a PDF that I could have printed off and kept, and it took me about 15 seconds to read what I needed to know.

The point of marketing is communication. Not everyone reacts to the same formula.  Some people want to read it in print, some want to see it in pictures, and yes, some will take the time to find the video, maybe download a player, and then sit through a commercial and put up with slow buffering. Think about your audience!

BTW-the shop I was trying to research?  I don't know if they do transmissions or not. I went someplace else.

Can you afford that free money?

One city in New Jersey has discovered what savvy nonprofits have known for years. There are costs attached to free.

As detailed in this Fox.com news story, a donated helicopter has cost the city of Newark NJ over one million dollars since it was acquired in 2005. That's not surprising when you consider the chopper was over thirty years old when they got it.

    

A deeper dive into the story shows that most of the costs break down into normal maintenance and repair costs, as well as upgrading its technology.

That's the same problem faced by grantees. The initial award just sets the recipient organization up to need ever more grants to maintain the original goals outlined in the first award.

The trick is in deciding if the added costs provide forward momentum for your mission.

New or proposed nonprofit founders often can't see beyond grants when it comes to funding their mission, so they fail to develop a plan to add the necessary diversity in their funding strategy.

If I had a dollar for every nonprofit that has asked me to find grants to fund their start-up, I could not only retire to an island, I could buy the island.

After verifying the need for your mission, the very next thing I ask people who want to start a new nonprofit is "What's your strategy to pay for it?"

Almost without exception the answer is grants.  Wrong answer!

The answer to that question should be something like this.

1.  Develop a five-year plan that includes a budget projection.

2.  Research the funding options available and develop a fundraising plan.

3.  Make grants the least important part of that plan.

As a new nonprofit, you are not going to be able to qualify for grant funding for a minimum of one year, and more realistically it's going to be three years.

More importantly, grants require that you have at least some infrastructure in place and have real results to offer to grantors, meaning that your, like all businesses are going to have to spend money to get the free money.

Throughout the nonprofit world, grants comprise about 12-14% of all nonprofit funding and many have a matching component, meaning that you have to have enough money on hand that you can commit part of it to achieving the grantor's purposes.

I can help youget your nonprofit off the ground, but if you want me to find you free money you'd better understand the costs to acquire it.

Are you sure your nonprofit needs money?

No matter the mission, the most often repeated line in most of my email is:

"If we just had more money we could (Fill in the blank)."

There is no doubt that money greases the wheels of philanthropy, but if you don't understand the  challenges of delivering your services, all the money in the world won't help.

Take the Bill and Melinda Gates Foundation. No shortage of money there. Yet a reprint of a Seattle Times article, posted January 3, 2015 in the Philanthropy News Digest, tells us that even the commitment of a quarter of a billion dollars doesn't guarantee success.

One interesting quote from the article mentions that the Foundation underestimated the difficulty of achieving their desired results due to the lack of even the most basic infrastructure in the areas they were trying to serve, indicating that someone was a little short in planning skills.

On a much smaller scale, a charity working with domestic violence victims was involved in a program to provide computer training, with the desired end result being that the women wouldn't need to depend on their abusers for income.

While they had some success, their program was only graduating about 12% of its participants, and was having trouble attracting funding after the initial $25,000 grant they received. The results just weren't there to impress new funding sources with the program's effectiveness.

When they approached me to find them at least $100K in funding for more computers and class space, I had to tell them that their results just didn't justify asking for that kind of money. To their everlasting credit, instead of firing me on the spot, they asked "why?"

The problem was that they had not anticipated that many of these women had less than a tenth grade education, and for some of them, even that education was over 20 years old.

While teaching them to use a keyboard was pretty easy (most of them had cell phones and knew how to text) some of them couldn't read well enough to understand the online help or even how to find it. All the classes did for them was to reinforce the idea that they were losers, and they simply quit coming to class.

It was like teaching someone how to use a hammer to drive a nail, without any knowledge of what driving that nail actually did to build a house.

It's easy to jump from "let's form a nonprofit" to expecting that your program will immediately get to its desired end result.

Money doesn't necessarily fix the ills of the world. It takes a lot of time and hard work, and sometimes more than a few false starts before you begin to achieve results that can attract more funding.

In the case of the nonprofit illustrated above, they had to back up, add a step, and focus on offering simple basic tutoring to improve math, reading and comprehension skills, an approach that did net them about another $20K in funding from their original grantor almost immediately.

As frustrating as it was, in the end the ladies they wanted so desperately to help got a lot more out of that approach, and many (81%) went on to successfully complete the computer skills classes and get jobs.

This all goes back to understanding the process of being a nonprofit. It's easy to see a problem, but a lot harder to plan a fully designed and effective program that  produces results worthy of continued funding.

The good thing about that problem is that you don't need much money to solve it. You do need a solid organizational plan, a willingness to learn to recognize and overcome obstacles and the patience to achieve it in baby steps instead of giant leaps.

If you do your homework, you can actually outperform even the Gates Foundation, and that's surely something you can be proud to report.