By Julie Kaley, SBDC Consultant
Businesses typically start with a great idea that an Entrepreneur believes would be successful. Along with the idea, there is a lot of excitement, uncertainty and sometimes an overwhelming feeling. Where to start? What do I need to do? Will this business work?
Step 1: The Business Plan.
Writing a business plan serves many purposes. It will allow you, as the potential business owner, to think through all of the different aspects of running a business. Your business plan will address Sales & Marketing, Human Resources, Distribution and Finances.
Writing a business plan should help you to examine the details of how you will actually run your business. You will define what it is you will be selling, analyze your competition, explore how to obtain customers, getting the word out, dealing with employees, and give you a thorough understanding of the finances surrounding the business.
Step 2: A Closer Look at Finances
Whenever I am advising a potential Entrepreneur on their business plan, a common concern is the finance portion of the plan. Specifically: How much money do I need to get started? How do I project much will I bring in and will it be enough?
My advice is to do a few simple exercises to get you started on the right track. The first exercise is to calculate your “Start Up” costs. Go through and add up any and all expenses you will incur in order to set up your business and get things started. This can include: Professional Fees, Insurance, Licenses and Permits, Start Up Advertising, first month rent, Supplies, Inventory, etc. I also recommend building in a little extra for unexpected costs. Once you arrive at this number, you should have a good understanding of how much money you will need to get started , as well as any equipment and supplies needed. You can then begin to work on how you will obtain these funds.
The second exercise I recommend is to calculate your ongoing expenses on a monthly basis as best as you can. This will include fixed costs like rent, utilities, insurance, equipment, lease payments, payroll, etc., as well as variable costs such as inventory, extra labor, gas, etc. Again, I would add a little extra for any unforeseen expenses. By completing this exercise, you will get a general idea of how much it takes to run your business every month. Once you have this monthly number, we are now ready to do Exercise #3 the Break Even Analysis.
Step #3: The Break Even Analysis
Exercise #3 utilizes the monthly expenses to guide you to a minimum amount of revenue thatyou will need to generate in order to break even. Breaking even means having enough money to cover all of your expenses for the month; it does not include a profit. A break even analysis is a vital exercise to any business.
For example if we have determined that our monthly expenses are around $5,000, we know that we need at least $5000 worth of sales / revenue each month in order pay the bills and break even. Of Course, you would need to generate more than $5,000 in order to make a profit.. Once you have this number you can begin to put together the pieces in order to see if you can generate enough revenue on a regular basis to have a sustainable business.
This article originally published on the Alliance SBDC website.