My favorite part of business planning is developing the financial plan. This is when we lay all our assumptions out on paper and try to realistically predict how much $$$ it will take to start our business, what it will earn over time, and how long it will take to become a profitable venture.
It’s the first test of financial viability and it’s super insightful! We might work through the numbers and discover that our business, in its current model, will NEVER be profitable.
This doesn’t mean the business idea can never work, just that we need to make adjustments until we reach a viable model. It’s much better to know this upfront!
Creating a Financial Plan
The questions in this exercise will help you evaluate your business’s viability:
1. How will I earn money?
Through private lessons? Group lessons? Lessons taught by other teachers? Renting space to other teachers? Selling products? Publishing music? Performing? Do I have other skills and passions I can monetize?
In business speak, each of these categories is called a revenue stream. List all your revenue streams, along with their prices and how much you realistically expect to earn from each. These are your sales projections.
2. What will I spend to earn that money?
Make a detailed list of one-time startup expenses (instruments, business registration fees, logo design, website setup, etc.), and ongoing business expenses (marketing, insurance, instrument maintenance, online administrative services, credit card processing, etc.).
My startup expense worksheet has a list of categories and some more tips to help you get started. Grab it here:
3. When will I earn that money?
Take all those revenue streams and map out your expected income, month-by-month, for the next year. Be realistic about the rate at which you expect your business to grow and gradually increase income.
Match the income with the expenses you will incur each month to generate that revenue.
Calculate the difference at the end of each month. (Warning: It may not always be positive.)
The report you just created is a slimmed down version of a cash flow statement. It gets its name because it tracks how money flows in and out of a business over time.
It’s an important tool for financial planning because it shows when you’ll have cash shortfalls and helps you plan your spending strategically.
Think about this:
- Are there months where expenses exceed income? Do I have cash in the business to cover those months?
- Can I afford to invest now?
- If I don’t invest now, will I lose out on income I was counting on in the future?
The cash flow statement is especially valuable for businesses that require a significant upfront investment and for multi-teacher studios, where the owner must balance investing in the business with managing higher day-to-day expenses, like payroll.
4. Can I make a profit?
If you’re starting a studio from just a few students, there may be time where you’re investing more money in your business than you’re bringing in. This is OK, as long as there is an eventual payoff and you have a way of supporting yourself until then.
Think about this:
- With my current model, will my business ever be profitable? (If not, can I rework the model?)
- How long will it take for the business to break-even?
- Is it worth it?
How are you feeling after completing this exercise?
Maybe you’re feeling confident! Assured that you have a solid financial plan in place that can support you. Awesome!
Keep comparing your actual business growth to the projected growth to make sure you’re staying on track.
Maybe you’re feeling discouraged. Confused by how anyone manages to make this music studio thing work.
Don’t throw the towel in yet. Lots of teachers support themselves by teaching and you can, too.
Try tweaking your model or looking for other ways to boost income or cut expenses.
It’s far less stressful to test different hypothetical situations on paper than to get trapped, wasting time and money on a real-world business that has no shot. (Unfortunately, I see this a lot. ☹)
I love working on business plan challenges with music teachers! If you want help with your plan, schedule a FREE mini coaching session so we can figure it out.