How to find out if your small business idea will make money
February 12, 2021
This post, about the numbers behind your small business idea, originally was published by Venturize, a blog powered by our content partner Small Business Majority, a national organization that advocates for small business owners.
There are many excellent reasons for starting a business: being your own boss, loving what you do and enjoying the challenge of getting your enterprise up and running. But at the end of the day, you need your business to make money.
Now that you know that your business idea has legs, it’s time to see if your business makes sound financial sense.
Starting any business costs money and time. Even starting small with a home-based business can involve the costs of registering your business and office expenses like getting a new computer, chair and desk. Other businesses can have higher start-up costs, including things you may not always think of like intellectual property law fees, a new website or extensive marketing costs. If you’ll need a physical business location, you’ll need to consider expenses like signing a lease, build-out costs, purchasing expensive equipment or hiring workers.
Knowing your business model is key to understanding just how expensive it will be to start your business.
Look at the numbers
Tools that can help you calculate the cost of starting your business include:
- Startup costs template: This SCORE template helps you calculate the cost of getting your business up and off the ground.
- Tip: Even after carefully calculating your expenses, add a cushion. You never know what snags you will hit.
- Break-even analysis template: How many products or hours do you need to sell in order to cover your costs? This SCORE template will help you calculate the answer. Is selling that number of hours or items doable?
- Tip: Remember this is the break-even point and you will need to sell more for a profit. Also, if you need to bring home a salary, don’t forget to include it in your calculations.
- Financial projections template: After you have done some in-depth research to find out your numbers, you can enter that information into this robust SCORE template. It helps you estimate startup expenses, payroll costs, sales forecast and a 12-month cash flow. It also helps you create an income statement, balance sheet, break-even analysis, financial ratios, cost of goods sold, and amortization and depreciation.
- In addition, use this Resource Locator Map to find local assistance providers in your area that can help you understand these financial tools and resources.
- Tip: Be conservative in your estimates. Entrepreneurs are inherently optimistic—why else would you start a business? However, it often takes longer and requires more money to open your business and get customers for your business than you may think.
Don’t forget to look at the opportunity cost of using your time and money to start your business. If you weren’t working on your business, how else would you be spending your time? If you’re digging into personal savings or investments to make the numbers work for your business, what interest rate would your money get if it wasn’t invested in your company? Is it still worth it to open your business?
Starting a business is no small task. Deciding to turn your idea into reality should come after serious thought and consideration. But while being an entrepreneur is hard work, it’s also exciting.
You think you’re ready to take the next steps to turn your business idea into reality? Check out our other resources on finding financing and writing a business plan. Also, stay tuned for the next post in our “Turn your bright idea into a business” series.
In case you missed it:
FE Small Business Finance offers several loan options for business owners who want to grow their operations and are planning for their long-term needs. Contact our loan experts about your business and they’ll work to match you with a financing plan that best suits you. Reach us at email@example.com or (619) 243-8667.