The Payroll Peril-o-Meter: A Tool to Help Young Firms Survive

The Payroll Peril-o-Meter: A Tool to Help Young Firms Survive

Introduction:

If you’re a founder of a young and small professional service firm, you know the constant struggle of keeping your business afloat. The late nights, the relentless pursuit of clients, and the endless worries about making payroll each month are all too familiar. But fear not, for there’s a tool that can help you navigate these treacherous waters – the Payroll Peril-o-Meter. In this blog post, we’ll introduce you to this powerful tool that can be a game-changer for your business. We’ll walk you through its components and how it works, followed by a real-world example to show you its practical application. By the end of this article, you’ll understand the importance of managing your payroll peril and why joining Collective 54’s mastermind community could be the best decision you make for your business.

Part 1: The Payroll Peril-o-Meter Unveiled

The Payroll Peril-o-Meter is a financial assessment tool designed to help founders like you gauge the health of your young professional service firm. It takes into account four critical components:

    1. Cash in the Bank: This is the cash reserves your firm has on hand at any given moment. It’s your financial cushion and the first line of defense against unexpected expenses or revenue shortfalls.
    2. Backlog: Backlog represents the contracts and projects that your firm has already secured but has not yet executed. It’s essentially your pipeline of guaranteed revenue in the near future.
    3. Accounts Receivable: Accounts receivable are outstanding invoices that clients owe your firm. It’s the money you’re expecting to receive from completed work.
    4. Sales Forecasted to Close in the Next 30 Days with >90% Probability: This component looks at the potential new business that’s nearly guaranteed to come in within the next month. It provides a glimpse into your future revenue stream.

To calculate your Payroll Peril score, you sum up these components and then divide them by your total monthly payroll. The resulting number tells you how many months your firm can comfortably make payroll without any additional income. The key benchmarks to remember are:

    • Less than 3 months: You’re in peril, and immediate action is required.
    • 3 to 6 months: You’re stable for the short term.
    • More than 6 months: You’re in a strong position and can breathe easier.

Now, let’s dive into an example to make this clearer.

Part 2: A Practical Example

Imagine you’re the founder of a 3-year-old consulting firm with 10 employees. Let’s break down your Payroll Peril score:

    • Cash in the Bank: $50,000
    • Backlog: $300,000
    • Accounts Receivable: $100,000
    • Sales Forecasted to Close in the Next 30 Days with >90% Probability: $50,000

Total Cash Flow = $50,000 + $300,000 + $100,000 + $50,000 = $500,000

Total Monthly Payroll = 10 employees @ $100,000/year = $1.0 million/year = ~$84k/month.

Payroll Peril Score = $500,000 / $84,000 = 6 months.

In this scenario, your Payroll Peril score is 6 months. This means that you have a comfortable six months’ worth of payroll expenses covered, and you’re not in immediate peril.

You are not at risk of going out of business. You can pay yourself. And you do not need to lay anyone off. But, 6 months goes by in a hurry. You would sleep better at night if you had a year of runway. A year of runway would allow you to be more strategic. It would allow you to spend your time on bringing your long-term vision to life. With only six months of runway, you are working in the business, not on it. And you should be. You are edging towards being in trouble.

The Payroll Peril-o-Meter is a simple tool that gets to the essence in a hurry. Young firms do not need over-engineered and complicated financial reporting. Practically all of your expenses are payroll. Making monthly payroll is priority #1. Keep it simple and hopefully this tool helps you do so.

Conclusion: Join Collective 54’s Mastermind Community

While this example demonstrates a stable position, the reality for many young professional service firms can be quite different. The constant hustle and uncertainty of cash flow can be overwhelming. That’s where Collective 54’s mastermind community comes in.

Collective 54 is a community specifically designed for founders like you. It provides invaluable resources, mentorship, and a network of peers who understand the challenges you face. By joining, you gain access to expert advice and strategies for managing your business effectively, including tools like the Payroll Peril-o-Meter.

Don’t go it alone. Embrace the opportunity to learn from others who have been through the same challenges. Join Collective 54’s mastermind community today and take the first step towards securing a prosperous future for your professional service firm. Your journey to financial stability and success starts here.