Will Your Business Idea Make or Break You?
Before you begin a business there are a few questions that must be answered to determine if the idea has potential to be a profitable business.
What is your ultimate goal? Do you want to sell the business at a gain?
Do you want to work at it part time for extra cash, or quit your regular job and work at it full time?
Do you want to have staff run the business for you?
How much profit do you have to make to make it worth your while?
If you know "your number" that will make it worth your while, how much do you need to sell to reach that amount?
That is where revenue (money from sales) = expenses + profit.
First, lets calculate the break-even amount - the amount you have to sell to have $0 profit. That is where revenue = expneses.
Before you calculate, you need to know your costs and your retail selling price. Let's say you make gloves. Calculate your variable costs of materials and labour to make the gloves or what is the per-unit cost to buy the gloves from a wholesaler? In our example, let's pretend we can buy gloves from a wholesaler for $5 and we will sell the gloves for $15 retail. Determine the gross profit per pair of gloves (per unit) by subtracting the retail price from the variable costs. We are making a gross profit of $10 per pair of gloves (price is $15, minus our direct costs are $5, for a total of $10 gross profit per unit). Costs that don't change depending on how much you sell is a fixed cost. Let's say those fixed costs add up to $10,000 for an annual contract of a booth rental at a local market, yearly costs for advertising and other admin fees. To determine break even take the fixed costs and divide by the gross profit per unit. Using our figures, we would take $10,000 / $10 and the result is 1000 pairs of gloves. The sounds like a lot, but on a weekly basis it is only 20 pairs.
Next calculate how much profit you want to make out of the business. Let's say that is $90,000 a year. To calculate how many pairs of gloves you have to sell to cover your expenses and profit we first add together the expenses and profit. In our case, that is $10,000 + $90,000 = $100,000 Divide that by the gross profit per unit (remember, that was $10 per unit).
$100,000 / $10 = 10,000 pairs of gloves a year
That is 193 per week to make it worth your while. Is that feasible?
Perhaps not for a local market booth. Can you scale the business to sell more with less fixed costs such as online or through a distributor? Happy profit pursuit.