THE SMALL BUSINESS ADVISOR

BEFORE YOU LAUNCH YOUR BUSINESS, RUN THE NUMBERS

 

Recently in a late night conversation, a friend told me that they were thinking of opening up a muffin shop.  After talking to several people, he was getting great receptiveness to his idea.

 

“How do the numbers look”, I asked?

 

“Figuring there are around 1200 homes with roughly 2.5 people in each household able to buy my product, gives me a total population of roughly 1200 times 2.5 potential customers.”  I’m guessing that at least a third of those people will visit my shop three times a week so all together, I should be able to sell about 12,000 muffins each month.  (1,200 x  2.5 x 1/3 x 3 per week x 4 weeks=12,000 muffins).  At $2.50 per muffin, that amounts to around $30,000 each month in revenue.”

 

“Sounds good”, I said.  “How do your expenses look?” “I have to be honest” he said, “I haven’t gotten around to figuring them yet.”

 

“Well, if you’re game, I am”, I said.  We sat down at the computer and pounded out the numbers.  The costs could be divided into two categories.  The first were variable and depended on the number of muffins sold.  Others were fixed meaning that they stayed relatively constant each month.  In most cases, the numbers were best-guesses.  I’ll tell you how my friend made them more dependable in a second but first, this is the preliminary scenario we developed: 

 

Revenue (monthly)
	Muffins Sold	12,000
	Price per muffin	$2.50
	Total Revenue	$30,000
Costs (monthly - Excludes initial setup costs)
				120	Hours Open/week*4 weeks
				$10	Pay/Hour
				$1	Taxes & Other Benefits
	Payroll ea Month	$2,640		2	Workers/Hour
				1,200	Square Feet
	Rent	$15,000		$12.50	Price/Foot
	Utilities	$400
	Ingredients	$9,000		$0.75	Cost of ingredients/muffin
	Wasted Muffins	$1,800		20%	Percentage of muffins made
	Insurance	$200			On equipment; customer liability
	Professional Services	$200			Accountant, Attorney
	Marketing & Promotions	$200			Printing, Mailings, Marketing Consultant
	Total Costs	$29,440
Profit (or loss)		$560

 

My friend took the numbers and refined them further. As he investigated each cost category, he was able to uncover many other related costs and considerations that would become part of the equation.

 

To deal with the fact that both the revenue and the costs could vary a great deal depending on various uncontrollable factors, my friend developed different sets of assumptions that allowed him to test out the impact of different events occurring.  Deciding what numbers to include in the best and worst case scenarios was as much art as science.  Even in his most extreme cases, he tried to stay within the realm of the probable because there was little benefit in developing scenarios that were truly outlandish.  (One of his potential investors insisted that he get a more concrete forecast of his likely product demand, but how he did that goes beyond the scope of this article.) 

 

My friend also knew that it would take a while to ramp his business up.  For that reason, he refined his projections to consider how the business would change on a month-by-month basis for the first 36 months of business.  He also found that he would have substantial start-up costs.  As long as the business was sufficiently profitable, he could get a loan for those startup costs and eventually pay them off with the profits earned from his business.

 

It didn’t take him long to realize that just selling muffins wasn’t going to be enough to keep his business afloat.  He added additional items with relatively high margins to his product offering.  In doing so he was able to find ways to spread his fixed costs across a wider array of revenue sources.  At the same time, he had to be careful not to carry such a broad array of products that his inventory costs would become an unmanageable burden.

 

Building the business plan was an essential component in launching his business.  It was a key piece of information that helped him decide whether to go into business.  He compared his likely profits at the end of the day against the amount of his time he’d have to invest in the business and came to the realization that, at least for the first year, he’d be working pretty cheaply.  However, after the business became established it had the potential to turn a nice profit.

 

The business plan was also essential for discussions with potential investors and loan providers.  And it became the basis for the establishing business goals and budgets.

 

Obviously, there were a lot of factors that he needed to include.  Because this was his first time working through a business plan, he knew he would have to engage an accountant to take his project to the next step.  However, he had done enough of the preliminary computations to verify that it was worthwhile to incur the expenses associated with engaging other professionals such as an accountant and attorney.

 

Everyone who is considering launching a business should first run the numbers.  The following books, available at the Geneva Public Library, can provide more information on how you can start to build your business plan:

 

Business Plans Made Easy  by Mark Hendricks, Entrepreneur Media, Inc publisher.

 

Basics of Successful Business Planning by William R. Osgood, Amacon; a division of American Management Association publisher.

 

How to Start and Run Your Own Retail Business by Irving Burstiner, Ph.D, Carol Publishing Group.

 

Tim Hadfield is a Mill Creek resident and Director of Strategic Consulting for The Allant Group, a data-driven marketing services firm.  The events depicted in this article are for illustrative purposes and may not be entirely factual.  If you have questions or comments related to this article or you would like to be a guest columnist for “The Small Business Advisor”, please contact Tim at 630-208-4828 or thadfield@allantgroup.com.