The Economics of the Business

THE ECONOMICS OF THE BUSINESS

This Section looks at the Economic and Financial Characteristics of the Business.

The information will support the pricing and cost projections through additional financial analysis.

Gross and Operating Margins
Know the magnitude of your gross margins. Calculate the gross sales (total sales) per month and the total variable costs. Each product or service will have a margin (a portion of the sales dollars minus the allocated variable costs). Ideally the financial picture should breakdown to a single dollar with each cost item taken as a percentage. Initially your costs can (will) exceed 100% of your sales. This just means that you have a negative cash flow and is not critical unless you don't meet your break-even date. Go To Margins Chart

Profit Potential and Durability
Profit is the reason to be in business (even a charity - because the profit is the donation you give to the recipients of the charity). You must project the Gross Margins, the EBT (Earnings Before Taxes) and the EAT (Earnings After Taxes). Durability can be a nebulous area (hard to define). Profits can be thought of as perishable or durable. Many factors can affect this quality. The firmness of your costs, price wars, changes in the market place, customer attitude, general economic factors and many others. Greenlight and try to come up with as many positive and negative things that will affect your price and costs. Better to do it now and come up with a survival strategy than to encounter them later and have the business fail because you were not prepared.

Fixed, Variable and Semivariable Costs
This area involves a lot of tedious detailed work, but if you don't do it, it will catch you later down the road. You must detail all your fixed costs, variable costs and semivariable costs. Show them in both dollars and percentages. They will be based on your product and service costs and will vary depending on the volume of business you do.

Months to Break-even
Many business (mostly scams) show days or weeks to break-even. There are one or two businesses that actually meet the criteria of very low costs and immediate sales to achieve this quick break-even. But, there are no guarantees even in these businesses. Expect to have to work hard to achieve any reasonable amount of profitability. This key milestone in your business is based on your entry strategy, marketing plan and proposed financing. Express your break-even as a per unit value, based on previous margin calculations.

Months to Reach Positive Cash Flow
The note on scams above applies here as well. This is another major business milestone that is part of your goal setting plan (a target with a date). The break-even and the positive cash flow items are tied to your estimate of the cash required to start the business. If you run out of cash before reaching either of these goals you may have to re-evaluate your projections.