Recently, ABC News Now interviewed me [see interview here] on my 5 Tips to Get Unstuck When Starting Your Own Business. One of my tips was about “working the numbers,” and I’ve received numerous requests to expand on this topic.
I meet many entrepreneurs passionate about creating businesses around their exciting ideas, which is great, but too often they forget to do a little math to ensure profitability. After all, if you’re not a hobby or a non-profit, you need to make a profit to sustain your business.
Don’t be afraid of the numbers because they can be really helpful in shaping your direction. Answering a few simple questions will help reveal the wisdom of your business idea, or uncover a flaw that you can rework to ensure success.
5 questions to ask yourself about your business idea:
1. What price can the market bear for your product or service?
2. What is your initial capacity to provide that product or service?
3. What are your costs associated with that capacity?
4. How many units of your product or hours of service can you realistically sell?
5. Do you have anything left over, profit, before taxes for paying yourself?
For fun, let’s take a business idea and run through the numbers for a month to see how it measures up. Let’s say that you love dogs, and have designed an adorable dog sweater that everyone loves and thinks you should sell.
1. Price: You think that you can sell the dog sweater for $40.
2. Capacity: You can knit one sweater a day times 20 work days in a month equaling 20 sweaters a month.
3. Costs: You know that each sweater costs you $10 in materials to make. So 20 sweaters = $200/month.
4. Sales: Assuming you will sell all the sweaters you make each month: $40 x 20 = $800
5. Profit: Subtract your costs ($200) from your sales ($800), and you have $600 in profit for a month.
This simple example shows you are profitable. But keep in mind that you will have other costs such as marketing, taxes, etc.
So while this idea would not pay your mortgage yet, it’s a start. Your next steps would be considering ways to increase your profits.
First, let’s look at the income side of the equation. Ask yourself if you can increase the price. Perhaps you could focus on high-end doggie boutiques in wealthy neighborhoods or rich doggie catalogs. Another idea would be to explore how you can make more sweaters faster. Could you hire some low-cost contractors (maybe retired grandmothers looking for a little extra spending money?), or consider investing in a knitting machine to expand production?
On the flip side, look at your costs. Perhaps consider changing your business model altogether by selling the knitting pattern for your doggie sweater instead of the sweater itself. This lifts your limit on sales and you’re not held captive by your ability to crank out sweaters.
Get it? Work your numbers. By taking a little bit of time for planning and making sure that your business model is profitable, you’ll ensure that your business is a success!
© 2010 Ali International, LLC
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