Is Your Small Business Idea Feasible?
As you know the first thing that needs to be done is a Business Plan. But where do you start? How long does it have to be? At what point do you see if this small business possible?
I advise for businesses to start with numbers. You want to know how much you will have to make in the business to pay your bills and make enough money for it to be worthwhile.
Since you are working with a new business it is all new and the numbers are all guesses, so how do you know if the business will work if the numbers are all basically plucked from the sky? Market research, demographics, and industry reports can all help us judge if there is a viable market, but this is busy work and can be time consuming.
I usually start with three simple sets of numbers. Note that I say “Start”, because this is only the beginning to your research. With that being said, here goes…
Start Up Costs – Add up all of the costs that it will take to key open your business on grand opening day. This everything you need to spend before you open.
Building renovations – or build out
Other Costs – website, professional fees, signs, uniforms, cards, brochures, outside services, etc.
Working Capital – Money needed for at least 3 to 6 months of operating plus 1 to 3 months of inventory. If your company will bill out for payments outside of 30 days, you will need more working capital
Total these expenses and figure out how you are going to finance this project. Keep in mind that your contribution to this should be at least 20 to 30% for lenders/investors to be interested. If there is an amount that you need to get financed figure out your monthly loan payment. Start with a sample term of 5 years and 7% interest on non real estate and 20 years and 7% interest on real estate/land. Use Bankrate.com to calculate your payments.
2. Operating Expenses – These are your “fixed” operating expenses. The bills that will come to you month after month AFTER you start your business. These may include the following:
Office Supplies (not inventory)
Professional Fees/Outsourcing fees
3. Income/Sales projections – This is where the guessing begins. Don’t let it intimidate you. By coming up with a preliminary guess you can work the projections into the costs of the business and visually see if you the numbers will work and if you will make money. If you have a pretty solid idea of what the project will cost for start up and operating, you can guess at the sales numbers to see if your plans will cash flow. Keep in mind that once you try to sell this idea to a banker or investor, you will have to back up your sales guesses with solid research.
Nail down what you think your pricing structure will be. What will the product cost you and what will the price be to customers. Create a menu of services with prices and costs listed next to them.
Outline an average week or month of total sales including costs . How many widgets will you sell on Monday, Tuesday, etc… or how many will you sell in an average month. Take this average month and increase or decrease the amount during busy and slow months. Now you have projected income on a monthly basis for a year.
Figure out what the percentage of your total sales per month will be in cost of goods or services sold. Total sales minus your COGS will be your Gross Profit per month.
4. Create a financial projection by using the above numbers. SCORE’s national website has a free Financial Projections Worksheet that works great.
If you need extra help call us at the Iowa Western SBDC or if you are in a different area or state contact your regions SBDC through the ASBDC. Iowa’s other regions are listed at the Iowa SBDC website. SBDCS are a free resource to help you start successfully.
Picture credit to: http://www.flickr.com/photos/farleyj/
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