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Is Your Business Going To Be Successful?
If you believe in fortune-tellers, then you should consult with one and stop reading further. Outside of using a crystal ball or tarot cards, the answer is no one can tell you whether your business is going to be successful or not. This uncertainty, however, should not discourage you from preparation, analysis, and implementation, realization of your dream. With a few well-established pointers, you can be better prepared to deal with such uncertainties. For example, what is known as the “Texas Two-Step” is often used in evaluating the viability, feasibility, and stability of a potential business venture.
STEP ONE: B-E (break-even) Analysis
A break-even analysis shows the amount of gross income/revenue needed in order to cover the expenses. A break-even analysis helps illustrate all the expenses that go into producing the revenue. When the revenue surpasses the break-even point, then the business stands a good chance of making a profit. Most experienced businessmen/women use a break-even analysis as a primary screening tool for new business ventures. It is not recommended to write a complete business plan unless the break-even point forecast shows that the projected sales revenue far exceeds the costs associated with the venture and your return on investment. The break-even analysis starts with research; you must determine your projected sales volume and your anticipated expenses. You will need the following numbers in order to complete your calculations: fixed costs; variable costs, gross revenue, cost of goods sold, return on investment margins, average profit per unit, and average gross profit per unit. Once you have concluded that your revenue surpasses the break-even point, then you continue to Step Two.
STEP TWO: Forecast Financial Projections
After you have entered the above-numbers into a spreadsheet, it will be easy to figure out whether this venture is worth perusing on its face. If your break-even point is higher than your expected revenues, do not give up. You might need to decide whether your plans can be revised in order to create an achievable break-even point. For example, you could find a less expensive source of supplies or you might want to run the business without employees. After tinkering with the numbers, if your break-even point is still higher than expected, then you should scrap your business idea. However, if you still truly believe in your business idea, you might want to consult with a professional in order to ensure that you have left no stone unturned. An expert might recognize other revenue streams for your venture that you may have not considered. Moreover, an expert may be able to suggest some effective cost saving ideas that would make your venture even more profitable.
Now, if your break-even forecast shows that the business will make more revenue than needed to break even, you can consider yourself fortunate. You, however, still need to figure out how much profit your business will generate in order to pay bills on time – is cash flow going to be an issue? For example, an income statement can help illustrate your monthly business activity. A cash flow statement will help you manage your business by figuring out how much actual cash you will have each month in order to meet your expenses. A start-up cost spreadsheet will help you account and understand all the expenses that will incur before your business opens.
Once again, there is no sure way to know whether your business will make it or not, but with some preparation, analysis, and some luck, you will make your dreams come true. Make sure you consult with an accountant, and most importantly, get yourself a business lawyer.
Good luck!
