This page helps you determine whether you have chosen the “right” business for you—one that you know, like, and will work hard for and that makes economic sense. Most experienced businesspeople complete several steps as a rough and ready template to decide whether to complete a plan. If your business passes all these steps with flying colors, it means it’s a good idea to write a full business plan; it doesn’t guarantee success. On the other hand, if
your proposal doesn’t pass, you’ll probably want to modify or change your plans altogether.
If you’re like most people, chances are your business will pass some tests easily
and fail some of the others.
Know Your Business
One of the most common questions people ask me is this: What business should I start?
My answer is always the same—start a venture that you know intimately already. I don’t believe any business exists that is so foolproof that anyone can enter and make a sure profit. On the other hand, a skilled, dedicated owner often can make a venture successful when others have failed. Remember,
your potential customers will exchange their money only for the conviction that you are giving them their money’s worth. And that means you’ll need
to know what you’re doing. While this point should appear obvious, sadly—it isn’t.
Many people enter businesses they know little or nothing about. I did it once myself. I opened an automobile tune-up shop at a time when, seemingly, they couldn’t miss. I knew a good deal about running a small business, had a personality well suited for it, and could borrow enough money to begin. The end of what turned out to be a very sad story is that it took me two years
and $30,000 to get rid of the business.
Why? Because in my hurry to make a profit, I overlooked several crucial facts. The most important of these was that I knew virtually nothing about cars and I didn’t really want to learn. Not only was I unable to roll up my sleeves and pitch in when it was needed, I didn’t even know enough to properly hire and supervise mechanics. In short, I made a classic mistake—I started a business in a “hot” field because someone was foolish enough to lend me the money.
How can you apply my lesson to your situation? Let’s say you’ve heard pasta
shops make lots of money and you want to start one. First, if at all possible, get a job working in one, even if you work for free. Learn everything you can about every aspect of the business. After a few months, you should be an expert in every aspect of pasta making, from mixing eggs and flour, flattening the dough, and slicing it into strips. Ask yourself whether you enjoy the work and whether you are good at it. If you answer “Yes,” go on to the second important question: Is the business a potential money maker? You should have a pretty good answer to this question after working in the field for a few months.
If you’re unable to find employment in the pasta business, make a tour of
delicatessens and shops that make their own pasta. Interview the owners. To get reliable answers, it’s best to do this in a different locale from the one in which you plan to locate. Small business owners are often quite willing to share their knowledge once they are sure you will not compete with them.
I remember reading a management philosophy that said that a good manager
doesn’t have to know every job, only how to get other people to do them.
That approach may work well in a large corporation, but for a small business, it’s dangerously naive. In short, don’t start your small venture until you know it from the ground up. I mean this literally. If you’re opening a print shop, you should be able to run the presses and do paste-up and layout, as well as keep a coherent set of books.
If it’s your elegant little restaurant and the food isn’t perfect, you’re the one who either improves it in a hurry or goes broke. If you don’t like getting your hands dirty, choose a clean business.
Are You Choosing a Risky Business?
When considering the businesses you know, it is helpful to know how well they typically fare. For instance, these businesses have higher than average failure rates:
- computer stores
- laundries and dry cleaners
- used car dealerships
- gas stations
- local trucking firms
- infant clothing stores
- machine shops
- car washes
- grocery and meat stores.
If your business idea is on this list, it doesn’t mean you should abandon it automatically. However, it should remind you to be extra critical and careful when preparing your plan. I’ve known successful businesspeople in every category listed, just as I have known people who have failed in each of them.
Be Sure You Like Your Business
Does the business you want to own require skills and talents you already possess?
If you have the necessary skills, do you enjoy exercising them? Think about this for a good long time. The average small business owner spends more time with his venture than with his family. This being so, it makes sense to be at least as careful about choosing your endeavor as you are about picking your mate. A few of us are sufficiently blessed that we can meet someone on a blind date, settle down a week later, and have it work out wonderfully. However, in relationships, as in business, most of us make better decisions if we approach them with a little more care.
Be sure you aren’t so blinded by one part of a small business that you overlook
For example, suppose you love music and making musical instruments.
Running your own guitar shop sounds like it would be great fun. Maybe it would be, but if you see yourself contentedly making guitars all day in a cozy little workroom, you’d better think again. Who is going to meet customers, keep the books, answer the phone, and let potential customers know you are in business? If you hate all these activities, you either have to work with someone who can handle them, or do something else.
Here’s one last thing to think about when considering how much you like your business idea. In fact, it’s a danger that threatens almost every potential entrepreneur. Precisely because your business idea is yours, you have an emotional attachment to it. You should.
Your belief in your idea will help you wade through all the unavoidable muck and mire that lies between a good idea and a profitable business. However, your ego involvement can also entail a loss of perspective. I’ve seen people start hopeless endeavors and lose small fortunes because they were so
enamored with their “brilliant ideas” that they never examined honestly the negative factors that doomed their ventures from the start.
Describe Your Business
What is your good idea? What business do you want to be in? It’s time to look at
the specifics. Let’s say you want to open a restaurant. What will you serve? What will your sample menu look like? What equipment will you need? Note that including french fries means you’ll have to install french-fryers, grease traps in the sewer line, hoods and fire extinguishing systems. On the other hand, by not serving fried foods you will save a lot of money in the kitchen, but maybe you’ll go broke when all the grease addicts go next door. Or suppose you want to sell DVD s, games, or digital cameras. Do you plan to have a service department? If so, will you make house calls, or only accept repairs at
your store? What sort of security system will you install to protect your inventory? What about selling component sound systems or home entertainment centers? What about competition from nearby retailers?
Answers to these types of questions will be crucial to the success of your venture and to writing your business plan. Let me tell you from hard, personal experience that you need a written document—even if you’re sure you know exactly what your business will do.
With this foundation document to refer to, you are less likely to forget your good plans and resolutions in the heat of getting your business under way. Any changes you later make can be made both consciously and with consideration.
Each of the business categories requires different skills to run efficiently. Many small businesses involve one or two types of business in the same endeavor. But if your idea will involve you in several types of business, it may be too complicated for you to run efficiently. As a general rule, small businesses work best when their owners know exactly what they are about and strive for simplicity.
- Retail. Retail businesses buy merchandise from a variety of wholesalers and sell it directly to consumers. Some retailers provide service and repair facilities, while most do not. Most retailers just take in the goods and mark up the price, sometimes doubling their purchase price to arrive at a sales price. Supermarkets, mail order catalogue merchants, computer stores, dress shops, department stores, and convenience marts are retailers.
- Wholesale. Wholesalers buy merchandise from manufacturers or brokers and resell the goods to retailers. Normally, a wholesaler maintains an inventory of a number of lines. A wholesaler normally does not sell to consumers in order to avoid competing with his retailer customers. Wholesalers usually offer delivery service and credit to customers. This type of business is characterized by low gross profit margins (sometimes varying between 15% and 33% of the wholesaler’s selling price) and high inventory investment. Wholesalers typically buy in large lots and sell in smaller lots. Like retailers, they seldom make any changes to the products. Most wholesalers aren’t well known to the general public.
- Service. People with a particular skill sell it to consumers or to other businesses, depending on the skill. The end product of a service business is normally some sort of advice or the completion of a task. Occasionally, a service business sells products as an ancillary function. For example, a baby diaper cleaning service may also sell diapers and baby accessories. Service business customers normally come from repeats and referrals. It’s common to have to meet state licensing requirements. Hairdressers, carpet cleaners, consultants, housecleaners, accountants, building contractors, and architects are examples of service businesses.
- Manufacturing. Manufacturers assemble components or process raw materials into products usable by consumers or other businesses. This type of business ranges from an artisan who makes craft items to General Motors. The most difficult part of the manufacturing business is to find a product, or even better, a series of products, that have acceptance in the marketplace and generate a steady sales volume. Or, as one businessperson put it: “Production without sales is scrap.”
- Project development. Developers create and finish a saleable commodity by assembling resources for a onetime project. Normally, the developer knows the market value of the finished product before she begins work. When the project is complete, the developer sells her interest in the project, normally directly to the user or consumer. To understand project developers, consider a woman building a singlefamily house on speculation. She buys the lot, secures permits, hires a contractor, gets a loan, builds a house, and sells it. She is then ready to go on to another project. Other examples of project developers include someone who buys, restores, and sells antique cars and someone who purchases dilapidated buildings at a bargain price, fixes them up, and sells them. Software development note: Software development differs from software production and sales in that software developers create a product that another entity produces and markets. For example, Fred Jones creates a bookkeeping program for employment agencies on his own time. Then he sells or licenses production and marketing rights to the Acme Programs Co. for $1,000 cash and 5% of future sales. Fred is the project developer and Acme is the manufacturer. If Fred also produces copies and markets them himself, he acts as both developer and manufacturer.
Successful businesses share a common attribute: They do something useful for
their customers. One way to determine what is useful for your customers
is to identify and describe the problem that your business will solve. For example, a window washing service solves the customer’s twin problems of wanting clean windows but lacking either the time or physical ability to clean windows himself. If you accurately understand your customers’ problems and
needs, your business will have a better chance of success.
For example, here’s a problem faced by a customer of a pizza-by-the-slice stand:
“I’m hungry and I don’t have much time or money, but I’m tired of hamburgers and want a change of pace. Also, I’d like to be able to specify the exact ingredients I want in my meal. And, it would be really swell to have a glass of wine or beer with the meal.”
Now, think about your customers for a minute. What is the problem that you solve for them? Take a sheet of blank paper or open a computer file and write out your description of the problem your business solves for its customers. This statement will become part of your completed business.
Professional working women like to buy fashionable, slightly conservative
clothing at moderate prices. They prefer shopping at convenient times
and patronizing stores that offer a wide selection of merchandise. These women
like to talk to sales clerks who understand fashion and know their store’s
merchandise; few clerks in the local department stores have this knowledge.
At the present time, many of these women travel 45 miles to shop because
no local store meets their needs.
Next, describe how your business will solve your customers’ problem. Take your time and do a thorough job. It’s very likely that the first time you attempt this task, questions will occur to you that you didn’t consider previously. If so, figure out a good answer and rewrite your description. The important thing is not how long it takes to do this, but that you end up with a realistic, well-thought-out business description. After all, it’s cheaper to answer questions and solve problems on paper than it is with real money.
Your business description should explain exactly what you will provide for the
customer as well as what you’ll exclude.
Each of the choices you make in your business description will affect the amount of money you’ll need to start or expand and how much sales revenue you can expect.
Consider the following series of questions when writing your business description.
If you answer both the general business questions and each question that applies to your business, you’ll present your business accurately and fairly.
General Business Questions
These questions apply to most small businesses.
Feel free to skip any questions that don’t pertain to you.
- What problem do I solve for my customers?
- Who is my typical (target) customer?
- How will I communicate with my target customer?
- What products and/or services will I provide? Are there any products or services my customers may expect me to provide that I don’t plan to provide?
- Where will my business be located?
- Where will I buy the products I need?
- What hours will I operate?
- Who will work for me and how will they be paid?
- Who will handle critical tasks like selling, ordering, bookkeeping, marketing, and shipping?
- How will I advertise and promote my business?
- What are the competition’s strengths and weaknesses?
- How am I different from the competition, as seen through the eyes of my customers? (Make sure that you answer this question from a customer’s perspective and not from an owner’s point of view.)
Specific Business Questions
Some issues your business faces can be categorized by business type. Make sure your business description addresses both the general business questions that apply to your business and the questions specific to your type of business.
If you plan to conduct operations in more than one category, be sure to use the specific questions for each type of business that applies.
- How will I keep abreast of fashion and taste in my field?
- Does my location have enough drive-by or walk-by traffic to support my business, or must I rely on heavy advertising for sales?
- Is it better to be in a shopping center with high rents and operating restrictions, or in a separate location with lower costs and less drive-by or walk-by traffic?
- How much inventory will I buy in comparison to my expected sales revenues? (This is a critical question in the retail field and deserves your close attention.)
- Which product lines will I carry in inventory and which will I order as required?
- Will I carry accounts for my customers or work on cash only?
- Are there any exclusive distributorships available to me?
- Will I have to market all the products myself or will the manufacturers have marketing programs?
- Are my credentials and skills equal to or better than others in my field?
- Can I sell my service as well as I can perform it?
- Will I take work on speculation or will I insist on cash for each job?
- Do I have a client list to begin with or will I start cold?
- Am I better off associating with others or being independent?
- Does my manufacturing process create toxic or polluting materials? If so, how will I deal with them and what regulatory agencies handle them?
- Is there a pool of readily available, affordable skilled labor where I want to locate?
- Will I make products for inventory or per order?
- Will I make one product only or a line of products?
- If I succeed on a small scale, do I plan to sell out to a larger company or try to compete nationally or internationally?
- Is my competition from small or large firms?
- Am I sure of the selling price of my project?
- Am I sure of my projected costs? What will happen if my costs are higher than estimated?
- Am I sure of the time factors? What will happen if it takes longer than expected to complete and sell the project?
- What portions of the work will I contract with others to perform?
- Is there a definite buyer for my project? If not, what costs will I incur before it’s sold?
Taste, Trends, and Technology:
Let’s assume you have a good description of your proposed business, and the business is an extension of something you like and know how to do well. Perhaps you have been a chef for ten years and have always dreamed of opening your own restaurant.
So far, so good—but you aren’t home free yet. There is another fundamental question that needs answering: Does the world need, and is it willing to pay for, the product or service you want to sell? For example, do the people in the small town where you live really want an Indonesian restaurant?
If your answer is “Yes” because times are good and people have extra money, ask yourself what is likely to happen if the economy goes into a slump ten minutes after you open your doors.
To make this point more broadly, let’s use a railroad train as a metaphor for our economic society.
And let’s have you, as a potential new businessperson, stand by the tracks. How do you deal with the train when it arrives? You can get on and ride.
You can continue to stand by the tracks and watch the train disappear in the distance.
Or you can stand in the middle of the tracks and get run over.
To continue this metaphor, let’s now assume the economic train has three
engines: taste, trends, and technology.
Together they pull the heavy steel cars which can give you a comfortable ride or flatten you. Let’s take a moment to think more about each of these engines.
People’s tastes drive many of the changes our society speeds through. For example, in the 1970s, many of us changed our taste in automobiles from large gas guzzlers to small, well-built cars. American manufacturers didn’t recognize this change in taste until they almost went broke. The Japanese were in the right place with small, reliable cars and realized great prosperity.
Consider popular music as another example.
Music styles change every few years, and some bright businesspeople succeed by selling clothing and other accessories associated with each new music style.
What does this mean to you? Look at your business idea again. How does it fit
with today’s tastes? Is your business idea part of a six-month fad? Are you going into something that was more popular five years ago than it is now and is declining rapidly?
If so, you are likely to go broke no matter how good a manager you are and how much you love your business.
It’s one thing to understand that people’s tastes have changed and will undoubtedly change again and again, but it’s a lot harder to accurately predict what will be popular in a few years. I wish there were a central source of information about predicting future trends in any field, but there isn’t.
You have the task of looking into the future and deciding where it is going and how that affects what you do today. Fortunately, a little research can do wonders. Here are some tips on how to proceed.
Read everything you can about your field of interest. Attend trade shows and talk to people in small businesses at the cutting edge of the field. Talk to people in similar businesses. Read back issues of magazines aimed at your proposed field. Your goal is to know enough about your proposed business to spot the trends that will continue into the next decade. For example, if you’re interested in opening a night club from the 1950s featuring a piano bar, mixed drinks, and lots of room for smokers, you should know that the consumption of hard liquor and cigarettes has gone down sharply in recent years and that certain types of reduced-smoke lounges with wine and imported beer are doing very well. Putting this information together with other factors, such as your anticipated location and target customers, should give you a pretty good idea of what drinks you should offer. You might decide to serve a number of varieties of fine wine and imported beer and forget about a hard liquor license altogether.
This is a fancy name for the new items just coming out on the market. Technology is your innovative kitchen appliance, your home computer,
NASA’s new spacecraft, and even the proverbial better mousetrap. For example, lots and lots of people are working feverishly to come up with better video games, laser toothbrushes, wristwatches, TVs, and the like. Sometimes it takes years to perfect an item. That can be good news for small business owners, as there is plenty of time to prepare to profit. Perhaps you have heard of holographic imaging. This is the new video technology that enables three-dimensional images to be shown. This technology requires large amounts of capital and can produce great profits. Some people will surely profit handsomely from the opportunities that arise.
Of course, there is a downside to new technology, too. It often involves high risk.
There’s no guarantee of success just because the product is new. In fact, something like 80% of the new products introduced into the marketplace die a quick death.
Remember the Edsel, and eighttrack tape players?
What should you do to take advantage of new technologies? First, recognize
that large-scale new technology ventures require vast amounts of money and will be beyond your reach unless you plan to have your small business grow in a hurry.
Many companies expect to lose money for years during product development
and approval before developing a big hit.
However, there are often ways creative small business owners can find to participate in new technological trends. For example, many computer software companies started with little more than a good idea and a computer.
Or to think even smaller—but not necessarily less profitably—lots of carpenters have done well making ergonomically correct furniture for computer work stations.
Pay attention to new developments in your chosen field and think about how
you can take advantage of them. With all the camcorders being sold, many people will make a good living repairing them. Maybe that’s a good business for you. Or, if you plan to open a television repair shop, you should know that in the next few years many, if not most, new televisions will have HDTV technology. If you are the first TV shop to specialize in that technology in your
area, you may do very well.
In short, new technology is a mighty engine that can pull the economy in new
directions at terrific speed. Be sure you are riding on the train and not picking daisies on the tracks in front of it.
Write a Future Trends Statement
With this discussion of taste, trends, and technology, I have attempted to focus your attention on the broad movements in the economy that can affect your business idea. Also, remember that there are similar trends in your local community. It’s at least as important that you pay attention to these. For example, perhaps you live in a farming community with no manufacturing
industries and many migrant workers. It is unlikely that a high fashion clothing store would do well there, but you might do very well selling a new lighter, stronger, cheaper work boot, or chain saw, or stump puller.
Write down your first thoughts about what trends affect your business and where they will be in five years. Nobody expects a perfect forecast, but most financial backers want to know that you have thought through how your business will fit into the world in the next few years.
From the initial dot-com boom in the late 1990s through the subsequent “dot bomb” in 2001, through the post 2001 rebound, the only “constant” in the in online business world is “constant change.”
One thing is certain: the pre-2001 approach of just exploiting a hot domain
name and buying up cyber “real estate” no longer guarantees success. Today,
successful online companies track the same metrics as their offline counterparts—that is, they carefully watch revenues, costs, and profit and loss analysis. For example, one savvy Internet entrepreneur eventually closed his retail sporting goods store because employees—too busy shipping orders to Internet customers—were neglecting brick-and-mortar customers.
Some trends for success have emerged: a successful online retailer commonly
carries a wider assortment of goods than a traditional brick-and-mortar store.
Online retailers cater to an international market that operates around the clock.
Many online retailers try to keep inventory investment as low as possible by having some of their suppliers ship orders directly from the manufacturer’s location to the retail customer (known as “drop shipping”).
In this model, the online retailer pays the manufacturer’s invoice at a wholesale cost and collects cash via the customer’s credit card before an electronic purchase order is issued to the manufacturer.
And online retail business also requires intensive management and sometimes
requires a bit more vigilance than a typical retail store. These businesses often work on lower than average gross profit margins.
Finally, online retailers must either know, or must hire others who know, website programming as well as online banking and fulfillment operations—all of which are necessary to generate profits.
Online retail sales have been growing steadily and are forecast to continue
growing. The same is true for online companies that provide services. Google,
for example, earns steady profits from its online advertising program where a
business pays a fee for each click through to the sponsored link. One advantage of this program is that a merchant can track the cost effectiveness of the program on a daily basis (and stop or start it at any time).
Break-Even Analysis: Will Your Business Make Money?
Some people have a bigger problem than others when opening a new business. These are folks who are positively enamored with their business concept and are desperately eager to begin. They are so smitten and eager to start, they have no patience with the economic realities involved in their business. If you recognize this tendency in yourself, it’s extra important that you prepare a financial forecast carefully and pay attention to what it tells you. This step tells you whether your idea is a sure winner or a sure loser or, like most ideas, whether it needs work and polishing to make it presentable.
How can you tell if your business idea will be profitable before you implement
it? The honest answer is, you can’t. This essential fact makes business scary. It also makes it adventurous. After all, if it were a sure thing, everyone would go into business.
Just because you can’t be sure you will make money doesn’t mean you should
throw up your hands and ignore the whole problem. You can and should make
some educated guesses. I like to call them SWAGs (“Scientific,” Wild Ass Guesses).
The challenging part is to make your profit estimate SWAGs as realistic as possible and then make them come true.
The best way to make a SWAG about your business profitability is to do a breakeven forecast. Although a break-even analysis or forecast can never take the place of a complete business plan, it can help you decide if your idea is worth pursuing.
Most financial backers expect you to know how to apply break-even analyses to your business. Your backer may ask what your profits will be if sales are slightly higher or lower than your forecast.
Many experienced entrepreneurs use a break-even forecast as a primary screening tool for new business ventures. They won’t write a complete business plan unless their break-even forecast shows that the sales revenue they expect to obtain far exceeds what they need just to pay all the bills.
Otherwise, they know their business will not last very long.
You can use this technique as a “quick and dirty” profit analysis, but don’t
use it as a substitute for the full profit and loss forecast.
A breakeven forecast is a great screening tool, but you need a more complete
analysis before spending any money. Project development note: The breakeven analysis described below does not apply to a project development, since only one sale occurs.
This exercise is designed for a continuing business with ongoing sales
revenue. Before they begin, developers must know how much profit they will make after the project is completed. A developer prepares a break-even forecast every time she calculates the likely sale proceeds and subtracts estimated costs. Developers can skip this section, unless they need a refresher
course on break-even analyses.
To complete a break-even forecast of your business, you’ll make four separate estimates:
- Sales revenue. This consists of the total dollars from sales activity that you bring into your business each month, week, or year.
- Fixed costs. These are sometimes called “overhead,” and you must pay them regardless of how well you do. Fixed costs don’t vary much from month to month. They include rent, insurance, and other set expenses.
- Gross profit for each sale. This is defined as how much is left from each sales dollar after paying for the direct costs of that sale. For example, if you pay $100 for a dress that you sell for $300, your gross profit for that sale is $200.
- Break-even sales revenue. This will be the dollar amount your business needs each week or month to pay for both direct product costs and fixed costs. It will not include any profit.
Math alert: The following section requires that you make some simple mathematical calculations, which you’ll use to analyze your business.
Forecast Sales Revenue
Your first task is to estimate your most likely sales revenue by month for your first two years of operation.
This is both the hardest thing to do and the most important part of your business plan. Much of your hope for success rides on how accurately you
estimate sales revenue.
Keep in mind that you’re honestly trying to decide if your business will be
profitable. This means that you must base your forecast on the volume of business you really expect—not on how much you need to make a good profit. If you estimate sales too high, your business won’t have enough money to operate. But if you estimate sales too low, you won’t be prepared or able to
handle all the business you get.
Retail Sales Revenue Forecast
The simplest way to forecast retail sales revenue is to find the annual sales revenue per square foot of a comparable store. Then multiply that dollar figure by your estimated floor space to derive an estimate of your annual sales revenue.
Example: A similar business shows $200 of sales per square foot per year.
If you have 1,000 square feet of floor space, your estimated annual sales revenue will be $200,000 (1,000 x $200).
Naturally, your estimate should take into account everything that makes you
different from the other store.
Some chainstores, such as supermarkets and drugstores, have refined the art of
estimating sales to a science. Of course, they have the advantage of learning from their experience with their other stores. Even so, they occasionally make bad estimates. Supermarket executives first gather statistics on how much the average person living in town spends every week in grocery stores. These numbers are available by obtaining total sales volume of grocery stores from the state sales tax agency; normally that data is broken down by county. They estimate how many people live in the area for which sales volume statistics are gathered. Dividing the sales volume data by the number of people in the area gives them the average sales per person from grocery stores.
Then they compare the average sales per person with state averages. If it’s higher, it might mean that people living in the area have a higher-than-average income. They can verify that by referring to the United States Census, which lists average income. If the income per person is average or below average, and sales per person are higher than average, it probably means that people come from surrounding areas to do their shopping. If the sales per person are lower than average in the area, it might mean that income is below average or that people leave the area to do their shopping. On the basis of this sort of data, together with an analysis of competition and demographics, supermarket executives can develop relatively accurate estimates of sales volume for a new store.
Service Business Sales
To estimate sales revenue for a service business, you’ll need a good understanding of what steps you go through to generate a billable sale. Then make a forecast of how many times you expect to go through all those steps every week or month and how much revenue you’ll derive from those steps.
Don’t forget to allow time for internal matters and marketing. If you’re a sole
proprietor, you’ll need to allow somewhere between 20% and 40% of your time for nonbillable activities. If you have employees or partners, you’ll want to make similar allowances for them.
Manufacturing or Wholesale Business
If you plan to be in a manufacturing or wholesale business, read the sections
“Retail Sales Revenue Forecast” and “Service Business Sales Revenue Forecast” just above, and combine some of the concepts to estimate your sales volume. If you know as much about your business as you should, it shouldn’t be difficult to develop a reasonable estimate. If you’re having great difficulty, the chances are that you need to learn more about your business.
Example: Patty plans to import and wholesale modems for Acme computers.
Acme has told her that they have sold 100,000 computers to date and projections show about 1,000 per month for the next three years. Patty realizes she doesn’t know what percentage of Acme owners will want modems and decides to conduct a mail survey of Acme owners before completing her sales forecast.
Project Development Sales
Project developers are not required to complete a monthly sales revenue forecast. They need to know the likely amount they can sell the project for before they begin work; all revenue comes when the project is sold.
Forecast Fixed Costs
For most small businesses, the difference between success and failure lies with
keeping costs down. Many smart people start successful businesses in a spare room in their house, the corner of a warehouse, or a storefront in a low-rent neighborhood. Unfortunately, others sink their original capital into essentially cosmetic aspects of their business, such as fancy offices, and then go broke.
On a blank sheet of paper or in a computer file, make a list of the fixed or regular monthly expenses of your business.
Your objective is to develop a dollar amount of expense that you are committed to pay every month. This is your “nut,” or the dollar figure you must be able to pay to keep the business viable. Include rent, utilities, salaries of employees, payroll taxes, insurance payments, postage, telephone, utilities, bookkeeping, and so forth. Some Sales Revenue Forecast for Central Personnel Agency I like to allow room for mistakes in my forecast, so this sales forecast seems like overkill; my experience shows the overage is needed.
Since it’s harder to find qualified people than it is to find job openings, I’ll concentrate on finding people after I build a backlog of openings. I estimate I can find about ten job openings per week. I will allow myself two weeks to find 20 job openings. After the first 20, I’ll get plenty of openings by referrals and repeats. My income goal is to gross $3,000 to $4,000 per month, and I know that the average job order filled is worth $500 to $600 in gross fees, so filling only ten openings per month should give me about $5,000 to $6,000 in gross fees.
Finding good people is the hard part. It takes me up to 20 interviews to find one excellent person. Some of these interviews are done in a few minutes over the phone, but just the same, I allow one hour per interview. It takes an average of three good people sent out on interviews to fill one job. Of course, once I have a good person, I send that person out on every interview I can.
This means that to fill six to eight job orders per month and meet my gross income goal, I need 25 to 30 good people on file. Since it takes an average of one hour per person and 20 interviews to get one good person, I have a lot of interviewing to do. I can average five to eight per day, and it will take me about 60 days of interviewing to build a base of qualified people. I anticipate three months of fairly low income before I begin to reach my income goals.
There would be more to say on breaking even and the forecast models but any good accountant can show you the ropes and tricks of doing a good forecast.