Rules of Thumb

The rules of thumb, or heuristics, discussed in this document are meant to be helpful tips that are readily usable and can be easily remembered. They are not intended to be strictly accurate or reliable for every situation.

Advertising

-Keep 80 percent of your advertising budget invested in the “tried and true” methods that bring in a steady flow of profit, and invest 20 percent into the exploration of new ways to get your message to potential customers. (1)

-When writing an ad, use sentences of no more than twelve words. (1)

– Ads with people in them typically have a higher response rate than those without. (1)

Internet

– A user should be able to navigate to any page on your site within 3 or 4 clicks from the homepage. (1)

-Each user interaction required on a web site landing page is going to cost you 50% of the audience. (1)

Human Resources

-Only hire the next resource when there is an equivalent amount of recurring, bankable, revenue to support the associated costs. (1)

Financial

-$1 in capital allows you to increase your assets by $10. (1)

-Take a deduction in a year that you are in a higher bracket, rather than a year you’re in lower bracket. (1)

-A healthy business is worth about 5 times EBITDA … a high growth business, more. (1)

Miscellaneous

-80% of the sales come from 20% of the products. (1)

-If you typically use fewer than 400 cell phone minutes each month, prepaids are worth a look. (1)

-Landlords lose about two months’ rent at turnaround time, even if the unit doesn’t stand vacant for long. (1)

-Use the round number when you are talking theoretically, and the odd number when you are presenting hard data … theoretical: “Make $100,000 as a professional massage therapist.” … hard data: “Last year Henry earned $100,287.45 in his massage therapy practice.” (1)

Savings/Investing

-Pay Yourself First: Aim to set aside at least 10% of your take-home pay.  Paying yourself first is the most important bill you will pay each month.

The best way to implement this rule is to make it automatic. Pull 10% of your take-home pay and deposit it into a separate bank account.

If you already have a well-funded emergency fund and your short-term goals have been funded, you might funnel all of the ten percent into a retirement plan. Of course if you set aside 10% in your retirement plan, you’ll be contributing pre-tax which works out to be more than 10% after-tax. (2)

Short-Term Debt

-So-called “Bad” Debt should not equal more than 20% of your income.
List all your outstanding liabilities and their respective minimum/monthly payments. Now add up the minimum/monthly payment amounts and you come up with a figure.

Take this number and divide it into your monthly take-home pay. If the result is more than 20%, you’re carrying too much revolving debt.

You should aim to put at least 20% of your net pay toward paying down your outstanding debts. If you cease to add to your short-term debts today, you will find that you can pay off most of your short-term debt anywhere from 3-7 years. (2)

Retirement

-You need to save about 20 times your annual gross income to retire.
The solution is what author Robert Sheard calls the Twenty Factor Model.

Essentially the formula is:

Financial Independence = annual income requirement X 20

The formula is based on two centuries worth of returns in the stock market and the real rate of return (5% annually) you can expect to earn after taxes, expenses and inflation.

If you have 20 times your annual income requirement, it means that with the prescribed withdrawal rate of 5% yearly from your nest egg and the annual expected net return on your investments of 5%, you’ll never run out of money. (2)

Insurance

-You should have a policy equal to at least five to eight times your annual income as a minimum.
Some planners suggest even more than five to eight times your annual income as the level of coverage you should carry.

Please note that this factor or rule of thumb could be much higher, depending on the number of years of income you will have to replace. The highest “factor” I’ve seen is to multiply your annual after-tax income by 20. (2)

Selling a Business
-The sale price of a small business is between seven and ten times the average profit of the last three years. (7)

Getting Work Done
-People do best when they’re working at 80 percent of their capacity. At 50 percent, they get bored. At 100 percent, stress gets them. (7)

Choosing a Bidder
-Throw out the highest and lowest bids. Average the rest and choose the one closest to the average. (7)

Starting a New Business
-Do not start a new business unless you can wait at least one year before realizing a profit. (7)

The 80/20/30 Rule
-If you get rid of the 20 percent of your customers who cause 80 percent of your headaches, your profit will increase by 30 percent. (7)

Keeping Your Customers
-Between 54 percent and 70 percent of customers who complain to a company will do business again with the company if their complaint is resolved. That figure increases to 95 percent if the customer feels the complaint was resolved quickly. (7)

-The average customer who has had a problem with a company tells nine or ten people about it. (7)
-Customers who have complained to a company and who had their complaint satisfactorily resolved tell an average of five people about it. (7)

Working with a New Client
-A job with a new client will take about 25 percent longer than the same job with an established client. (7)

Balancing the Books
-When the books aren’t balancing, if the amount they are out of balance is divisible by 9 then there is a transposition error in your figures. (7)

The following are alternative sources of funding for small businesses that are worth looking into:

Sources of Funding

  1. The “Fs” … founders, family, friends, fanatics, fools … the starting point for most independent ventures … generally low to moderate sophistication, low to moderate investment …
  2. Bootstrapping
  3. Customers
  4. Suppliers …
  5. The “Strangers with Candy” … angels, investment clubs … wide range of investment interest and sophistication, generally low to moderate investment …
  6. The “Vulture Capitalists” (VCs) … venture capital firms … usually focused on a specific industry … moderate to high sophistication … a mistaken target for many new ventures, very few new ventures are funded directly by VCs …
  7. The “Big Ugly Monsters” (BUMs) … corporate venture capital … usually focused on specific industries and proven ventures … may fund internally-developed ventures … often part of a angel/VC network of investors …
  8. Corporations
  9. Bank loans … (3)

There are many helpful rules of thumb for small businesses available. We consider the ones listed in this document to be some of the most important tools; they can be used as a reference guide when starting or running a small business.

Sources Used:

(1)  http://businessrulesofthumb.com/

(2)  http://ezinearticles.com/?6-Financial-Rules-of-Thumb&id=420467

(3)  http://competitivecreativity.com/search/label/Finance

(4)  www.dictionary.com

(5)  http://www.investorwords.com

(6)  http://www.customerservicemanager.com/definition-of-customer-service.htm

(7)  http://bestbizpractices.org/2010/03/01/managing-by-rules-of-thumb/

 

Glossary:

Advertising– the act or practice of calling public attention to one’s product, service, need, etc., esp. by paid announcements in newspapers and magazines, over radio or television, on billboards, etc (4)

Human resources– people, esp. the personnel employed by a given company, institution, or the like. (4)

Short-term debtdebt with a short maturity, usually one year or less. A part of a company’s balance sheet within the current liabilities section. Short-term debt is usually due within one year. If a company has more short-term debt than available cash or investments to cover the debt’s payments, the company could be forced to take on additional debt and could be in poor financial health. (5)

Retirement– the period of a person’s life during which he/she is no longer working, or the commencement of that period. The standard age for retirement in the United States is considered 65, although many individuals choose to retire earlier or later due to personal or financial reasons. After retirement, an individual‘s needs are usually funded through any combination of sources including a pension plan, a retirement account such as a 401(k) plan, Social Security, and/or a savings account/nest egg. (5)

Insurance– a promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest. (5)

Bid– a statement of what one (as a contractor) will charge for something (as supplies or labor)

Customer– a person who purchases goods or services from another; buyer; patron. (4)

Supplier- someone who furnishes or provides (a person, establishment, place, etc.) with what is lacking or requisite (4)

Corporation– an association of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members. (4)

Bootstrapping– to help (oneself) without the aid of others (4)

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