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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?

 

  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.

  • Pluck a figure out of the air

  • What would you be earning if employed by someone else

  • Determine how much income do you need to retire, and work back from that position

  • Determine what you need to invest in the business and decide on your rate of return for that business

  • 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