This article continues my series on starting or restarting your business. By this time, you should know your business and how many prospective customers you can reasonably expect to buy from you. Now the moment of truth: Given everything you know so far plus your (hopefully conservative) assumptions, is your business concept viable? Answering this question requires some number crunching. This may not be your idea of fun but if a few hours of math avoids major problems down the road, then it’s time well spent.
Remember that your business must serve your needs, so you are the logical place to begin. How much does your ideal lifestyle cost? Think abundantly and in terms of your ideal life. I’m not saying you need expensive tastes; I am saying that your tastes and then some must be covered.
Armed with the number you’d like to bring home, you must now decide how many hours you want to devote to your business. Do you want to work in your business every day? If your business is your passion then the answer may be yes. The basic equation is simple: More personal involvement equals lower cost but lower equity, meaning that you’ll probably need to look to retirement accounts and other tools for ensuring your prosperity when you can no longer work the business. Less personal involvement equals higher cost and possibly lower profits (especially in the beginning) while buying you more time off, greater independence, and higher resale value. My default suggestion is to plan for a hybrid model that allows you to start your business as quickly and easily as possible and then put systems and processes in place to allow you to separate from its daily workings in the future. Will this work for you? Possibly. See my article “What’s Your Exit Strategy?” for more information (email me for a copy if you like).
How much can you charge for your products and/or services? Anthony’s First Law of Pricing begins by finding the low and high ends of the range your competitors charge and then placing yourself at 80% of the difference. For example, if the low end is $1,000 while the high end is $2,000, then you should be somewhere around $1,800. This is a very general rule of thumb that you must adjust based on your business’s unique benefits and your goals, but it is a good place to begin. Multiply the price for each item by the number of customers you expect to reach each month to find your target income. Got a mix of products and/or services? How much will your average transaction be and how are you arriving at that assumption?
From this figure, subtract your COGS (Cost Of Goods Sold). If you buy items for resale, how much do you pay per item? Multiply this by the number of items you sell to find your total COGS. If you manufacture items, how much do you pay for materials, tools, maintenance, etc? If you offer services, what costs are associated with providing that service? At this point, only look at the direct cost per item. We’ll deal with other expenses later.
Right off the bat, you’ve lopped a significant portion off your target income. Time for your first reality check: Is the remainder enough to support your desired lifestyle? If so, great! And if not? If you find yourself in this unenviable position, then something has to give. Do you need to reduce your expectations? Can you expand your market without risking the validity of your assumptions? Can you live with the reduced income as your business grows? Is there a reasonable likelihood that your income will grow to the target level and beyond?
All of these questions and more boil down to one simple yet profound question: Is your business model viable? If so, congratulations! If not, did you overlook anything or is there anything else you can do to make it viable? If so, do it, and then crunch the numbers again. In this case, be very careful if you arrive at a different result to make sure that you have corrected some error and/or modified some key part of your business model. In other words, be totally honest with yourself. If you think discovering that your idea won’t
We’re not done yet! Next week, we’ll continue looking at your expenses. Will your idea survive? Stay tuned…