I’m a big talker when it comes to how businesses should be transparent about their inner workings. However, it’s mostly talk. I admit that it feels very counter-intuitive to actually put it into practice in many situations. I’m trying to push the envelope a little at a time when it comes to articulating what’s going on behind the scenes here at Jackson Fish.

One thing that surprised me about running a business is how much fun it can be to learn all the small details about how it operates. It’s not that I like filling out forms. But there’s something gratifying about understanding all the ins and outs of how we need to pay our taxes, and watching money come in and less money go out.

Even though I’ve mentioned this before, I should say that we are already earning revenue doing contract work for jobs that are aligned with our long term goals as an independent software venture. This is our method for bootstrapping. And so far (thankfully) it’s working out nicely. We’ve been billing and collecting revenue, paying taxes, paying subcontractors, meeting payroll, etc. Making it work is fun.

Until you understand how everything works it’s hard to come up with reliable financial models for what your business is actually doing. And once you understanding the mechanics of the business it’s important to identify which numbers are the ones you should be paying attention to. Every business is different and therefore different numbers are critical.

One of my favorite spreadsheets as of late is our “Revenue Goal Calculator”. This does a relatively simple calculation:

fully burdened cost per employee per year
[x] average number of employees
[+] recurring fixed overhead per year
[+] state taxes paid on gross revenue
[=] breakeven revenue goal per year

I then take the breakeven revenue goal per year, divide by the number of employees and by 12 to get the breakeven revenue goal per employee per month. In other words, how much does each employee have to generate in revenue each month for us to stay afloat at our current burn rate. This is a handy number cause it really represents the point which we can’t go below. At the point where our non-consulting businesses are generating our breakeven revenue goal per year then we can stop the contract work or be even more selective about doing only contract work that furthers our long term goals the most significantly. We would spend all our time focusing then on creating our long term annuity generating businesses.

Of course businesses are (typically) not created to just break even. The next calculation goes like this:

fully burdened cost per employee per year
[x] average number of employees
[+] recurring fixed overhead per year
[+] state taxes paid on gross revenue
[=] breakeven revenue goal per year
[+] target profit per year per employee * number of employees (grossed up to include taxes paid on profit)
[=] target profit revenue goal per year

I take the target profit revenue goal per year and divide by the number of employees and again by 12 to get the target profit revenue goal per employee per month. Now we know how much employee should be generating in revenue on average in order to meet our profitability goals. If we’re doing contract work this is especially useful in figuring out what appropriate billing rates are (factoring in competitiveness, etc.). If we’re generating revenue from software we put out through advertising/subscription, etc. then we have the ability to understand how many people we can support at a certain level of income.

Aside from successfully and responsibly managing the eventual transition from consulting (to bootstrap) to generating our revenue from partner and customer annuity businesses, the number I will then pay the most attention to (post-transition) is profit per profit-sharing employee (which should be all full-time employees). Once the business is stable and generating consistent profit from the products we want to build then improving this number can become our main focus (aside from doing what we love).

I realize this is kindergarten stuff for most people who’ve run a business. But kindergarten can be fun when you’re going through it for the first time.