Four years ago, Julie & I decided we were (emotionally) ready to buy our first house. Santa Cruz is quite expensive, with the median house price weighing in at $740,000 and the medium apartment around $480,000. This was going to have a significant impact on our monthly cashflow. We had some savings, and a loving wedding gift from both our families gave us enough to put 20% on a small apartment or townhouse.
Julie and I sat down to figure out what mortgage payment we really thought we could afford. I was trying to stabilize my business at the time, as it was often feast or famine. Some months I could pull in $15,000, other months I would see $1,500. This discussion ran for weeks and continued into our family vacation.
Enter the parents. My father listened quietly as Julie and I ran through past numbers and possibilities for hours on end. One evening at dinner he asked me: “How much do you think you will make in the next six months?” A long pause ensued. The fleas began to leap for saftey as my craneum began to heat. I guess he couldn’t take the pathetic, confounded look on my face. “How much do you have in your sales pipeline?” he tried. I really didn’t know. Most of my gigs are word of mouth. Even the bids I was writing, or discussing with potential clients, could go on for months and fizzle. How was I supposed to know? After I suggested getting my tarot cards, dad laughed, put on his Australian leather cowboy mentor’s hat and asked me to pull out my trusty business notebook.
Count Your Current Contracts
He began by having me write down a list of all the projects I had contracts for. We added the estimated profit and completion date for each project, then totaled it all up. I’m trying to pull from memory, so it won’t be dead on. My sheet looked looked something like:
Current contracts between July 2004 – Dec 2004
|Learning Annex Online Classes||2k||Aug 04|
|Learning Annex Web||20k||Dec 04|
|IEEE GRSS||8k||Nov 04|
|Total||30k||July – Dec|
Counting my existing contracts was the first step. This is what I could depend on. Money in the bank as long as I didn’t screw it up and they didn’t renege. Taking the notebook from my hand, he then looked at me and stated, “Now let’s figure out what else you have in your pipeline.”
Evaluate your Pipeline
He began by writing a formula under the previous list.
value of project * % likelihood you win = projected $$$
It was rather simple and I frankly still have a hard time believing it works. He told that this is how some of the largest companies in the world project income. Three years later, I can now confirm that it is eerily accurate.
We took each of the potential gigs that I was aware of and picked a dollar value. It’s all guess work from here, so don’t get paralyzed by indecision. Next, he had me work out my odds of successfully landing a contract for the project. For some, the negotiations were well under way, for others, I had just sent the first email introducing myself.
Possible contracts between July 2004 – Dec 2004
I pulled out a calculator and went to town. Since we were buying a house and I needed my true take home amount, I subtracted my expenses and pulled out taxes.
|Gross income from contracts:||30k|
|Gross income from pipeline:||9.25k|
|Total projected gross income:||39.25k|
|– Total projected expenses:||5.75k|
|Total projected pre-tax profit:||33.5|
|Withhold 35% for taxes:||13.5|
|Take-home: 25k /6 =||4.15k monthly|
This “back of the napkin” number was remarkably close to what really happened that year. I begin to suspect my dad might just know more than I do. Nah, what am I saying.
As you become a professional at running your business, I find that your interest and passion for understanding the numbers always increase. It’s the difference between the technician and the entrepreneur. Want to focus further on your deal flow? Here are a few good articles I read this week:
The Better Closer Blog shared 10 Ways to Improve the Performance of your Sales Pipeline.
Web Worker daily has just posted a good article on Open source CRM tools, which will help you track the process.
Focuses Minded provided a nice overview of the client cycle, giving some detail on each of the steps of the sales process.
We bought the house
Mortgage rates were working in our favor and we found that we could afford up to about 400k worth of apartment. With my wife’s combined income we could pay the $2400/month of piti+hoa. We started the hunt, and eventually, with significant elbow grease and the loving patience of Paul Cuccia, Realtor extraordinaire, we found a home. Of course, marketing and sales skills from my business actually paid off – we ended up sending a personal letter to each and every unit in our chosen complex asking if they might be willing to sell directly to a young couple and save on 1/2 of their Realtor fees. We found our match, everyone got a deal, and 30 days later we moved in.
Today, we are under escrow and our townhouse should sell in a few weeks. We are buying a duplex. Live in one side, rent the other. In November, we start a new adventure and become landlords. Put that contracting money to work. It is part of the retirement plan, baby.