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Business Start up Feasibility
Model
The big question on the lips of most
business start ups is: What sales do I need to make? (often this is accompanied
by do I have the selling skills to make these sales?)
The model below will help you establish
your required sales level. It will provide you with a framework to help you
determine some key questions you need to ask and some clues about finding the
answers
Where do I start?
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What return
do you want from the business?
The real starting point is
goal
setting. What return do you want from the business? This return should
be in both financial and non financial terms. The
model will only treat the financial returns but you will
need to factor in the non financial aspects. These non financial aspects could include such things as: the opportunity to
meet people, a sense of achievement, the opportunity to make the world a better
place, travel (or not having to travel). It is good practice to make a list of
all the non financial returns you can get from the business. |
This is possible also a good time to
consider what you are prepared to commit to the business, especially in terms of
you time.
The return you will need from the
business will depend upon many factors, especially if it is a full time business
or only a part time business.
Some methods for determining your
desired return.
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Pluck a figure out of the air
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What would you be earning if employed by
someone else
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Determine how much income do you need to
retire, and work back from that position
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Determine what you need to invest in the
business and decide on your rate of return for that business
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A combination of the above
What will
it cost to operate the business?
This comes to developing your expenses
budget. Firstly lets distinguish between capital expenses and operating
expenses.
A capital item is something you
expect to use up over a number of years. For example a motor vehicle, a
computer (unless of course you are a motor vehicle or computer salesmen).
Only a portion of the capital expenses
find their way into your annual profit and loss statement, and that is by way of
depreciation (a non cash operating expense).
An operating expense is something
you expect to use up in the year. For example your rent, salaries and
insurance.
Your operating expenses have two
components: Fixed and Variable. Variable costs vary in proportion to your
sales. Typically these are referred to as your cost of sales. Fixed costs are
not directly related to you sales (typically things such as costs related to
Occupancy, Administration, Marketing, Depreciation, Travel). To some extent as
your accounting system becomes more sophisticated you are more able to apportion
expenses directly to sales)
Lets look at this by way of an example:
Fred starts up a fruit and vegetable
shop
Rent
Marketing
Accountancy fees
Insurance
Depreciation on Equipment
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