Will My Business Make Money? Work Out If It Will
It is important when setting up a business to know whether your idea of a new business will work. It could be a great idea, but if it isn’t going to make you money, then there is no point in breaking yourself physically or financially.
So there are ways of researching how sound, financially, your idea is.
By doing a break even forecast you will be able to work out whether a business will be a success or not. A break even forecast will show you how much money you will to make to cover the expenses of the business before making any profit.
Bring in more money than the amount of the expenses that you will need then you have an excellent chance of your business being a great success.
There are a lot of experienced business owners that use these break even forecasts in the initial stages of looking at starting up new businesses; even before writing an actual business plan.
A break even forecast will show what the projected revenue of sales will be, if it doesn’t exceed the cost of starting the business, it is best to leave that idea there.
To do a break even forecast – You will need to guess about certain revenues and expenses. It is best to know the ball part of these figures, so you are at least in the right region of costs. So research your market and make educated guesses.
The things you will need to estimate and calculate are:
These are costs that are pretty much the same on a monthly basis. Utilities, Insurance, Rent, Staff and anything else. Then work it out for the year.
The total amount of money you bring to your business from sales each year or month.
Gross Profit Per Sale
The amount of money left over after working out how much each sale costs you. Gross money minus cost per acquisition = profit.
Gross Profit Percentage
This will tell you what percentage of your sales revenue is gross profit. You divide the average gross figure (Above) by average sales price.
Once you have worked out all of the above. You can work out the break-even amount. Divide your monthly costs for the year by the gross profit percentage. This will show you how much revenue from sales that you will need to make so you can break even.
If you are not breaking even then you will have to tweak things so you can make this figure positive. Reassess your place of work. Get less expensive offices or supplies, maybe you could work from home? Could you do without some of the workforce that you anticipated? Maybe you could sell your services or products for more money?
You can fiddle with the numbers. But, if you cannot get the right number. Then this business is not going to work. Do not invest the money before you work this out. It will hurt!
This forecast is only the initial step that you should take. There are more in depth analyses that you should perform once you move forward with your business plan.
You should think about profit and loss forecasts, cash flow projections and work out how much it will cost you to start up your business.
These points will also need to be considered if you are buying a business that is already running.