It’s best to determine whether your business idea will make any money before you quit your job or invest your life savings. You can have a really great idea, but if it’s not financially workable from the start, it’s difficult to turn it into a successful business.
The first step to see if your idea is viable is to check capacity, so you know you physically can make enough product, or have the time to cover costs and make a profit. Let’s assume that your business idea is a service that you’re providing on your own. You’re planning to work 40 hours per week, and you’re charging yourself out at £50 per hour. So that adds up to £2,000 per week. But what if – when you calculated your start-up costs – your overheads are running £3,000 per week?
The answer is simple: your idea’s not financially viable unless you change something.
It’s the same if your business idea is retail-based. If your gross profit is 25%, and your overheads are £200,000 per year, you need to have £800,000 in sales (about £15,000 a week) to cover the overheads. Can you sell that much in a week? If not then either your idea is not financially viable, or you need to change how you've set the business up.
The next step is to look at what you can do to improve the viability at start up:
If you’re not able to do any of the above, and your business cannot cover overheads, then it’s time to think of another business idea.
Once you’ve worked out your capacity, it’s time to work out if you’ll generate enough revenue in sales to cover all your costs and make a profit. If you know exactly how much you need to sell each week, you will have a better understanding if it's possible to sell that much.
For example, if you’re manufacturing coffee tables:
Remember, this will pay your required salary, but there’s no extra profit margin in there to grow your business. We’ve got a calculator that will help you crunch the numbers.
If you can’t physically make this many tables, options are;
Regardless of your business, the same concept applies. Calculate out how many units, hours, orders or pieces of work you need each week to cover overheads and make a profit. Then see if it’s possible. If you have a coffee cart and must sell 50 cups of coffee an hour to make money, and you can only physically serve 20 cups, then you’re in trouble.
People will tell you that working out if your idea can make money includes things like market research, customer demand, working out your unique selling point and honing your competitive advantage. These are all true, but they’re the next step on the ladder.
The first and most fundamental thing you need to do is crunch those basic numbers. Because if they don’t add up, then all the rest is pointless. But remember that if the figures don’t come out the way you’d hoped, it’s not necessarily the end of your idea. There are always options for reducing your start-up costs, or increasing your product price or charge-out rate, in such a way as to make your idea financially viable. That said, it’s important to keep your numbers realistic, because the whole point of the exercise is to work out if it’s financially worth pursuing or not.
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