Pick up a pen and paper and sketch out an estimate of whether you can make money with this idea of yours. This exercise is called a “break-even analysis” and it is done to estimate whether the revenue will balance the costs of doing business.
There are several ways to do this, but here is one simple way to find out if your business idea will make money. You’ll need to do some research to get acquainted with your industry–the designer baby-bib industry, let’s say–and come up with a couple of numbers.
- Fixed Costs: What are the overhead costs that don’t change much month to month? $1,000
- Variable Costs: How much does it cost in materials to produce one bib? $10
- Price: How much do these bibs sell for? $15
Now we’ll plug these numbers into the following formula:
Break-Even Point = Fixed Costs $1,000 / (Price $15 – Variable Costs $10) = 200 bibs
In our example we find that you need to sell 200 bibs to break even. That’s no profit. No salary. Just covering your costs. But once you have the estimate sketched out you can tinker with it. What if you charged $20 for each bib? Already you’ve cut your break-even point in half: you now only have to produce 100 bibs to break even. Still not possible?
Back to the drawing board.
The people around you–your friends, family and significant other–are likely the sounding board and support network that have gotten your business this far.
But in order to go further, you will need funding, and these same people may spring to mind as a source. In fact, it is very common for new business owners to get started with money from friends and family. But you should never forget about options like personal savings, personal loans or lines of credit! A personal loan or investment from a loved one can be tricky, so follow these rules if you go that route:
- Weigh the consequences: Think about potential problems involved with mixing money and relationships. Your investors may want to have a say over your shoulder or may feel you “owe them.” You may also be more lax with these creditors, while they may not allow late payments.
- Make a pitch: Treat your friend or family member like any other investor. Craft a professional pitch, even if it is presented to your mother in her nightie.
- Put it in writing: Just to make everything clear, put down on paper the terms of how much you owe, the schedule for repayment and any penalties.
Where are you going to do what you do? Have you scoped out a vacant storefront? Are you planning on operating entirely online?
If you are going to be opening a business that needs office or retail space, consider these factors before signing a lease and hanging out your shingle:
- Your operational needs: This may seem obvious, but be sure to think through all aspects of your work and consider everything you may need from the space in the course of a regular week: Do you need a commercial-grade kitchen? Access to your office 24 hours a day? Readily available shipping services?
- Zoning: Make sure that any property you are looking to lease is zoned for business. And if working from home, make sure your business does not violate any home-office zoning restrictions.
- Licenses or permits: Once you have a location, secure the necessary licenses or permits for your city, municipality or state.
Turning an idea into a lasting business takes a lot of work and determination. The pure and persistent belief in yourself and your idea will power your business idea as much as a ton of business proposals.
As soon as your idea is fully formed, treat every potential business interaction professionally. Here are some suggestions:
- Get involved in the industry: Join professional associations, participate in online discussion boards, attend happy hours or start up your own club for like-minded entrepreneurs.
- Look the part: Dress appropriately for the industry and invest in business cards to hand out to those you meet.
- Separate your business and personal life: Establish one email and one phone number for business dealings, and make sure the email address is not too personal.