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The Value of Minimum Viable Income for Cash Flow

You may have heard of Minimum Viable Product, but what is Minimum Viable Income?

Firstly, let’s identify what Minimum Viable Product is.

The Wikipedia definition is “a product with just enough features to satisfy early customers, and to provide feedback for future product development”.

What, then, is the definition of Minimum Viable Income?

I define Minimum Viable Income to be the income required to pay all expenses of the business, no more and no less. In accounting-speak it is called Break-Even.  

STARTING OUT IN BUSINESS.

Minimum viable income is essential when starting out in business. It is essential in those early days when you’re spending money getting started before your first sale. And then in those months when sales are starting, and you’re building the business.

Knowing your Minimum Viable Income figure becomes the very first goal in business — the goal to have sufficient income to pay all the expenses. For more information on how to calculate it, refer to a previous article I wrote – Do You Know Your Minumum Income Required to Pay Your Bills. 

ADDING YOUR INCOME INTO THE MIX.

The Minimum Viable Income in the first instance doesn’t include any income for you. Once you’ve got to that level, you need to add in your income and increase the Minimum Income to include that and head for that goal. 

It’s only after you’ve paid all the expenses and yourself that you truly start to make profits in your business.

GROWING YOUR BUSINESS.

The key to Minimum Viable Income is not to forget it once you’ve reached that first threshold when you’re starting out, and you’ve started to make profits.

Business expenses will increase as your business grows, and so too, does the Minimum Income. Knowing what this number is as your business grows, will ensure that you are maintaining income at a level that is at least as much as is needed to cover the expenses.

It’s very easy to get lulled into a false sense of security that your income is covering your expenses. This can happen without realising that those expenses have been increased significantly. With the growth of the business and thus the Minimum Viable Income figure has grown significantly too. 

SEASONAL INCOME FLUCTUATIONS.

I have found from my experience mentoring business owners about their numbers that every business has one or two months when their income is lower than the other months of the year. 

In the case of one business, we found four months of the year that year on year are low income months. With the Minimum Income figure, the goal in those months was to meet that target for income, preferably more. But the aim was to have enough income to cover the expenses for those months.

The other months, the targets were considerably greater as those eight months were where the profit was made for the year.

Before I started working with the business owners, without knowing what the income target figure needed to be, the business regularly lost money in those months. This eroded the profits that had been made in the good months.

SETTING REVENUE TARGETS.

Once you’ve identified the Minimum Viable Income figure, you can add to that figure to set your goals for the profit you’re wanting to make each year. But always, keeping in mind the Minimum Income figure.

REVIEW REGULARLY.

It’s important to know your Minimum Viable Income at all times and review it regularly. Always review it when you’ve added a significant additional ongoing expense to the business. This could be a new employee, higher rent, increased marketing costs.

As a minimum review annually. After the end of the financial year, when you’ve got another 12 months of data is a great time to review this figure in conjunction with setting revenue goals, budgets and cash flow forecasts.

IDENTIFY FOR WEEKLY, MONTHLY, QUARTERLY AND ANNUAL FIGURES.

Once you’ve identified the Minimum Viable Income figure, break it down into monthly and quarterly figures. If you sell products or services on a daily basis, I’d also break it down to a weekly figure too.

Then, check against this target income each week, month and quarter to keep you focused on staying on track to achieve it. This is the same for your bigger financial goals.

And if you’re already making profits, it isn’t so much a check against your actual results, but knowing that as you look at the numbers, you’ve well and truly achieved your Minimum Viable Income and more.

 
Originally published on www.smallville.com.au
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