SAFE STARTUP THINKING FOR A NEW SMALL BUSINESS
For people who have never been in business before , here is one simple way to consider the reality of your new business idea. Keep in mind all businesses have different requirements to some degree but there is still some very simple but very revealing math you can apply as a forecast of what your business sales and expenses might look like before jumping in.
SALES – EXPENSE – PROFIT
Which ones do I really know? Can I confirm accurately my sales? If I can’t exactly confirm my sales, do I really know my expenses? And with sales and expenses unknown, do I know my net profit?
Over 90 percent of all businesses fail prior to the first year end. My experience in consulting has been that generally ”small business” people are over spent in their expenses prior to any real sales occurring or they plan on profits paying 100 percent of their living expenses to soon.
Here is a cool little (hypothetical) exercise that will get you started looking forward and projecting your potential income (obviously you're numbers will reflect you're own life situation).
Here’s the simple math.
If your sales are 100 percent and your expenses are 60 percent then your profit is 40 percent. So, let’s say you make 800 per week net at your day job (after taxes and all deductions) and it is paying your living expenses. So, we can say you still need around 800 per week to pay your living expenses going forward. So, that means that $800.00 is your net profits from your business needed to pay your living expenses.
So, remember that your profit is 40 percent of something (sales). So, Divide the $800.00 you need by 40% and you get your sales needed to produce the $800.00 living expense (rough estimate). Cool, so $800.00 divided by 40 percent equals $2,000.00 dollars per week sales. Awesome so we have sales now of $2,000.00 per week and net profits of $800.00 per week.
SALES $2,000.00 100%
EXPENSES ? 60 % (business expense)
NET PROFIT $ 800.00 40 % (current living expense)
So, from here you can do the math for the expenses a couple of ways, subtract the net profit from the sales 2000.00 – 800.00 = 1200 or multiply the sales 2000 x .60 and you have your rough minimum forecast of sales and business expense targets needed to support your current living expenses. Remember living expenses are separate from business expenses in this exercise. At this point we are looking at our new numbers and considering their accuracy.
SALES $2,000.00 100%
EXPENSES $1,200.00 60 % (business expense)
NET PROFIT $ 800.00 40 % (current living expense)
This is a reality check! People who follow this simple line of forecasting (looking ahead) will be more likely to discover major mistakes before they occur. Now you can get more detailed!
The GOAL is to be thinking this way throughout your small business adventure.
SALES, EXPENSES, PROFIT – SALES, EXPENSES, PROFIT.
Say you find your expenses to be higher than the 1200.00 say 2200.00, way more than originally estimated. So now we are needing to maintain our current living expenses but, whoa! our business expenses are going up!! So, sales need to go up if we want to keep our $800.00 living expenses constant, right? Here we can just add the two numbers together to get our new required sales. $2,200.00 + $800.00 = $3000.00, the sales needed to maintain our $800.00 living expenses (net profit).
So, what if the profit percent is less than 40%?
In that case assuming all the costs associated with the product or service are included in the expenses, then you only need to adjust the numbers. Now, let’s say the profit was only 30 percent as opposed to the original 40 percent and our living expense can not changed from the original $800.00.
Then the numbers would look like this.
SALES $2,666.67 100% ($800.00 divided by 30 %)
EXPENSE $1,866.67 70 % (business expense)
NET PROFIT $ 800.00 30 % (current living expense)
So we already see from these simple exercises we are looking somewhere in the neighborhood of $2,000 to $3,000 in sales “weekly” to accomplish our goal of just maintaining our current living standard of $800.00 net per week at somewhere between 30 and 40 percent net profit and 60 to 70 percent expense cost for our new product or service.
This is where you start to hold yourself accountable for the reality of your small business concept.
Goal accomplished!
Now, you have $2,666.67 in sales required by your product that sells for say $9.00 and that means you have a total of around 296 units to sell “every week” or about 15,400 units per year! Or, in a service business, sales of at least $139,000.00 per year!
If not, don’t quit the day job just yet! But wait! you're business expenses may be just 50 percent :)
Hope you enjoyed this simple exercise to make you “think” about your new venture.
Thanks, Good Luck!
Just One Opinion
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