In order to establish the feasibility of a business, a complete business plan, with financial projections for at least 3 years, needs to be formulated. But first, do a rough cut which will establish whether it is worthwhile putting the time, effort and expense into a full blown plan.
See Glossary below for explanation of terms
- EARNINGS Identify how much money you wish to earn from the business per year
- Estimate the percentage of gross margin you believe your product or service will produce
- Unit Price less Unit Direct Cost = Unit Gross Margin
- %GROSS MARGIN Calculate the typical Gross Margin percentage by dividing Unit Gross Margin by Init Price
- Make a rough BUT REASONABLE estimate of your expected Annual overhead costs, including DEBT principal and interest. Overhead Costs include are all other costs that are not Direct Cost
- The earnings model is Earnings = Sales times Gross Margin % – Expected Overhead
- SALES Calculate the Sales needed to generate desired earnings
SALES = (EARNINGS + Expected Overhead) times GROSS MARGIN %
EXAMPLE: Note: OH, Earnings, Sales $ and units are monthly figures
Notice the Break Even Sales level in the last column. This is the sales volume required to just cover the cost with no earings for the month.
Is the size of the business realistic compared to competition? What is your estimate of their sales? How many staff do they employ? What size facility do they have? Estimate their costs?Using the total required sales, re-examine your estimated overhead costs to see if they are sufficient to support the facilities and staff needed to support the sales: Can you go it alone, or do you need extra staff to cover extended hours beyond 10 hours/day, 50+ hours/week?
What is your estimate of funding requirements, not just for start-up, but for several months of ramp up? Where will you get this money? Do you have collateral? How is your credit rating? Can you get a loan?
Now, rework the plan with all the parts. Do you think the results show you can meet your desired income with a reasonable sized business that you can afford to finance?
If YES, proceed with a more comprehensive complete business plan to really establish the business’s feasibility. Get help from SCORE by requesting a mentor. Call the SCORE office at 865-692-0716 or register for a mentor on-line at https://greaterknoxville.score.org/
If NO, either revise your plans or put the idea on hold until you can answer the questions more favorably.
Fixed cost: Includes all costs that do not vary with activity. Fixed costs are the inevitable costs that must be paid regardless of the level of sales of a service or product. Overhead is considered a fixed cost, even though it may vary somewhat according to the amount of activity. Any cost that does not vary depending on usage or sales levels, such as rent, property tax, insurance, or interest expense.
Direct Cost: Also called Variable Cost. Includes all costs that are some function of activity. A cost of labor, material and any other cost that change according to the change in the volume used.
Total Cost. Fixed costs and variable costs make up the total cost. While the total variable cost changes with increased usage, the total fixed cost stays the same
Source: http://www.inc.com/ November 2010 Revised May 2019 by Walter Williams, SCORE Mentor
The material in this publication is based on work supported by the U.S. Small Business Administration under cooperative agreement SBAHG-04-S-0001. Any opinions, findings and conclusions or recommendations expressed in this publication are those of the author and do not necessarily reflect the views of the U.S. Small Business Administration. The information contained in this publication is believed to be accurate and authoritative but is not intended to be relied on as legal, accounting, tax or other professional advice. You should consult with a qualified professional advisor to discuss issues unique to your business.
Copyright 1990. SBA retains an irrevocable, worldwide, nonexclusive, business royalty-free, unlimited license to use this copyrighted material.