Dear Aunty B,
Two friends and I decided to launch a business last year. There was enough space at my parents’ home to accommodate us so we wouldn’t have to lease an office (we really started from scratch).
Since these past couple of months we’re finally making a regular income and I’ve thought about asking them to agree on an amount to pay for rent (still less than what we would have to pay up for a similar place elsewhere); so far we pay our phone bill and that’s it. This is uncomfortable for me because, well, I’m the one living here.
I’ve had people telling me we can’t really know for sure what our profit is if we don’t have any fixed expenses (rent included), while others tell me we should cut down expenses as much as possible to increase revenue. Which is the right way? If you advise to pay for rent, can you suggest ways to ask them about it? I’m worried they might take it as an abuse.
Confused
Dear Confused,
Umm, you are thinking about this all wrong. First of all it is your parent’s house. Not yours. Of course your business (not your two friends) should be paying them rent. And why on earth are you talking about abuse? If anyone is being abused it is your kind, poor suffering parents who should be kicking back and planning dirty weekends not turning their home into an office for three excitable young entrepreneurs embarking on their first venture.
Second, you have taken a big step but can’t see it yet (which often happens in entrepreneurship). You have moved from three friends doing a hobby in your bedroom to the dawning realisation that you have the beginnings of a successful business.
So now is the time to sit down and work out where you want things to go. What do you all want out of the business? How fast can it grow? What are the trends in the marketplace? What are your staffing requirements going to be?
Basically you are doing a business plan, something you should have done before you launched the business but something you urgently need to do now. At the end of that process you will realise you need to incorporate and run things through your company. You will do a financial projection and realise what revenue you need to make in order to cover your costs and make a profit. Then you set up management accounts that tell you at the end of each month the revenue you have made, your costs and then finally the profit and loss you have made. Don’t be daunted by this. There are millions of small businesses in Australia and they all do this. Look around your family members and find an accountant (every family has one somewhere) and ask them to take you through this.
At that time you will look at your parents with love as you realise how much they are saving you by kindly paying your rent. You will also realise it is time you to contribute, for no other reason than you are growing up and it is what you should be doing. (Which is actually what you are doing so good on you!) You will then go and ring a few real estate agents and ask them how much an equivalent office/room would cost per year. Armed with that knowledge you will sit down with your business partners and tell them that the business has saved XX amount by being able to use these are the commercial costs of running a business. So you all have been very lucky and should be grateful to your parents.
But now the business (and keep using that word!) has two choices. Either move to an office (which your business partners may well want to do.) Or pay rent for your space. Once you have looked through your management accounts.
Now you could well make things work in your favour here. Remember the mantra of all start-ups: you beg, borrow or steal to stay alive. Now I don’t recommend the last but certainly focus on the first two. I am sure your loving parents/real estate agents want your business to succeed. Once you agree with your business partners what you can pay, call a business meeting with your parents. You or one of your partners is going to be in charge of setting the business up and doing the finance type stuff. They should lead the negotiations with your real estate agents. Be frank. You can’t afford much and hope they would be happy with the following figure for the next year. Tell them after that that you and your business partners will review the situation and either pay more rent or move out. Make sure you ask them about arrangements. Is there anything annoying them that could be changed?
At the end of this process you will know what your fixed expenses are and what rent will cost. Hopefully you have also done a deal with your parents that will give you and your business partners certainty in regards to your premises for the next year – and a cheap deal for which you will be eternally grateful!
Be smart,
Your Aunty B
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