Guide to Your Profitable Business Part 3

In this post, I continue my sneak peek of what is to come. Today is Part 3 of what will be a FREE guide to “Finding Your Profitable Business Idea.” If you missed them, here is Part 1 and Part 2.

Can I ask you to do me one favor? Would you read through it and take a minute to comment with your feedback or send me any questions you have? Your feedback would be so helpful as I continue to finalize the guide and ensure that it is a tool that truly helps aspiring entrepreneurs identify a profitable business idea.

Step 3 – Testing for Profitability

So far you have discovered your passion, skills, and the need for your product or service. Then you spent time testing your idea by talking with customers. Now that you know you have something that your customers need, you must figure out if you will be able to make money, how much you will make, and if that amount is worth your time.

I know some of you may be thinking, “I’m terrible with numbers.” I know numbers and finances can be intimidating but I promise I will lay this out in a simple way that will help you quickly determine if your idea can be a profitable business.

Will you make money?

My goal here is to help you get a general idea of how much you will make off selling your product or service. While this won’t be a comprehensive financial analysis, it will help you you decide if you should move forward with the idea.

For our purposes, we’re going to look at three examples that each have different sales targets, associated costs, and profit margins. I hope that one or more of them will have some similarities to your own idea.
Taco Truck – a food truck business selling tacos and sodas
Perfect Paintings – a business selling paintings of various shapes and sizes
Competent Consulting – a hourly consulting business

What Are You Selling?

Let’s start by figuring out the cost of getting your product or service into the hands of your customer. We do this by honing in on what you’re selling. Is it tacos, paintings, or an hour of consulting?

Some of you may ask, “What if I sell multiple items?” If this is your case, try and figure out your typical sale. For your taco stand, a typical sale might be two tacos and a soda. If you are an artist selling your paintings, you may want to choose the average price point for your paintings. To find the average price point, add up the price of all the types of paintings you will sell and then divide by the number of types. If you are a consulting business, you could charge by the project, by the hour, or by a certain number of hours.

Take a few minutes to decide on your typical sale. Then spend some time deciding what you will charge for this sale. You may need to do some research on similar products and services. Will you charge similar prices? Or are you offering products or services that offer a higher value, resulting in an increased pricing structure?

What Are Your Costs?

Once you know your typical sale, you can figure out the costs, also called variable costs, associated with your typical sale.

For Taco Truck, you can estimate the cost of the ingredients you need per taco. Maybe you estimate you would spend $1.50 on two tacos and soda that you think you can sell for $6.00. That leaves you $4.50. But you will probably need to provide plates, possibly utensils, and a cup. So let’s take another $0.50 for those items. That leaves you with $4.00 in profit.

In the case of Perfect Paintings, the majority of the cost will be your time. But, you will have material costs you need to consider. For a 16×20 painting you sell for $600, you estimate spending $100 on the canvas and other materials. That leaves you $500 in profit.

Competent Consulting can either charge by the project or by the hour. For this example, let’s estimate you will charge $200 per hour. Your plan to offer a bundle of 10 hours of consulting at a price of $2,000. While your costs will be low, you estimate spending $200 on travel expenses such as fuel and meals. That leaves you with $1,800 in profit.

Take a few minutes to estimate what your costs are for your typical sale. Remember, we are just trying to get an estimate, so don’t feel like you have to spend hours doing research. Once you have a list of your variable costs, use your price from the previous section to determine your profit.

Will It Be Enough?

Now that you know how much profit comes from your typical sale, you need to determine how much you need to sell to cover additional expenses and decide if this is a workable amount.

Keep the Doors Open

Once you have your gross profit and the profit before your monthly fixed expenses, you are ready to incorporate your fixed costs and determine the level of sales you will need to cover your monthly costs. Let’s consider all costs not directly associated with your product or service.

If your company is going to be like Tack Truck, you need to decide if you are going to be a pop up shop, food truck, or in a retail space. You may need to make truck payments or rent payments on a space. Use google to estimate what these payments will be or go and talk to someone running a similar type business and ask about their expenses. You will also need to think about utilities and equipment.

For Perfect Paintings or another artistic endeavor, you may be able to keep expenses low by using space in your home. Or you may need to check out what it costs to rent space in a local studio. Research the type of fees to display your work in a gallery. Do you sell online and what costs are associated with doing so? Those may be rolled into your typical sale cost, but you need to find this out. Go find some local artists and talk to them about the different options in your area.

In a case like Competent Consulting, your expenses may also be low. You may be able to work out of your home or a local coffee shop. But you may want to consider renting an office or shared work space. Also, you may need certain software like Microsoft Office or anything that is industry specific. These are usually paid on a monthly or annual basis. Try to find some freelancers in your area to help you think this through.

Break-Even

Now that you have an idea of your monthly costs (also called fixed costs), you can figure out how many sales you need to cover these costs.

Let’s start with the Taco Truck. Here are the monthly expenses:
Truck Payment & Equipment – $600
Business & Food Licenses – $50 (spread out over 12 months)
One Employee – $1,600
Your Salary – $5,000

Total Monthly Expenses – $7,250

Now we are going to figure out the break-even point for this business. Break-even is the amount of product or service you need to sell to meet your expenses. To find this out, you use the formula:

Monthly Expenses / Profit from Sale = Break-Even

To find the break-even point for the Taco Truck, we just fill in the numbers.

$7,250 / $4 = 1,812.5 or 1,813 sales (2 tacos and a soda) per month

We can break this down even further to see how many sales you need in a week or in a day. Estimating about four weeks in a month, you need 454 sales (1,813 / 4 weeks). Assuming you work six days a week, you need 76 sales (454 / 6 days) per day to meet your monthly expenses and get paid.

Now let’s look at Perfect Paintings:
Studio Space – $300
Online Store – $50
Business License – $5 (spread out over 12 months)
Your Salary – $5,000

Total Monthly Expenses – $5,355

Break-Even:
$5,355 / $500 = 10.7 or 11 sales (average painting) per month
or 3 sales per week

And lastly, let’s take a look at Competent Consulting:
Office Space – $500
Business License – $5 (spread out over 12 months)
Software – $100
Your Salary – $5,000

Total Monthly Expenses – $5,605

Break-Even:
$5,605 / $1,800 = 3.11 or 4 sales (10 hours of consulting) per month
or 1 sale per week

 

Will It Work

After finding your break-even point, you have to ask yourself if this is a reasonable number of sales to shoot for. Can you sell 76 plates tacos every day? Can you sell three paintings a week? Can you close one client a week for ten hours of consulting? If the answer is no, then you need to make some adjustments. If you aren’t sure, then I recommend talking to local business owners and possibly more customers.

If the answer is yes, you are ready to take on the world! You are ready to throw off the shackles and attain the freedom that comes with being your own boss, doing work you love, and having a positive impact on the world around you!

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