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Oct 24, 2008 
This post is a bit longer, but not too complicated. I hope you will read it an understand it before starting a new business…
In order to determine how to structure the business, it is valuable to estimate how large this company you are creating is going to be. Here are a few questions that you need to answer for the first year. I like to do all my forecasting on a monthly basis since many bills seem to be paid monthly:
· How much income are you expecting to bring in?
· How much are your fixed monthly expenses? (before you sell a thing)
· How much does it cost to make the product or service?
· What are your other costs with each sale? ESPECIALLY THE COSTS TO GET A CUSTOMER…
· Are you going to need employees?
· Are you going to need outside investment to run the business?
Next, you can create a very basic spreadsheet or notebook page. Start at the top and list a few items that you will change to see the impact…
INCOME
Average sale ($):
Expected # sales per month:
MONTHLY INCOME (sales): (calculated by multiplying the two numbers above)
Example: Let’s say your average sale is $212 (include what you charge for shipping in this number for now) and you expect to make 1 sale a day in the beginning, that would be about 25 sales a month and your monthly income would be $5,300. The top of the chart or spreadsheet looks like this. With a spreadsheet you can change these estimates and see the impact…
INCOME
Average sale: $212
Expected # sales per month: 25
MONTHLY INCOME (sales): $5,300
Now we need to estimate how much it costs to generate that $5,300 in sales income. The EXPENSES… Add a few more lines to your spreadsheet…
EXPENSES
Fixed monthly costs ($):
Variable Cost per month ($): (expected # of sales per month x total var cost below)
Fulfillment cost per sale:
Marketing cost per sale:
Total Variable cost per sale: (sum of two above)
MONTHLY EXPENSES ($):
First the Fixed monthly costs…
Lets say this is a home-based business and you already have a computer (later you can sell this to the business) and you need only a phone, a website, and a PO box and your fixed monthly costs are $150 a month. Of course, this is a bare bones business and we are assuming no employees etc…In cases where you are running advertisements in regular places where the cost is fixed then you need to include these in your fixed costs… in our example…
Fixed Monthly costs: $150
Now for the costs per sale, these are also called Variable costs because they go up with every sale you make. Let’s first look at the fulfillment costs since they are easiest to estimate…
· Costs to produce the good or service. Let’s say it is an Information product and it costs you $25 to make the CDs, videos and to print the material and put it all in a binder
· Costs to ship the product to the customer (let’s say its $7)
· Credit card transaction fees (if applicable.. for our example, $6)
You are just trying to get an reasonable idea of the numbers here. In our example fulfillment costs are $38…
You need to figure out what the cost is for you to get a new customer. One way is to pay an affiliate or sales commission to someone else to make the sale, another way is to market and send out postcards or letters, or to buy traffic on Google adwords.
Marketing Costs are Often Underestimated…
This number is really the number that is the most misunderstood and underestimated by most starting business people. If you don’t have any idea what this will cost, you need to at least understand that this is the factor that will determine your success more than any other thing. If you have something that is easy to sell, and it is easy to reach lots of customers you are going to have lower marketing costs than if it is a tough sale and the people are harder to reach. The higher your price point and the more you make on every sale, the more you can afford to spend to get a new customer.
Just for our example, lets assume that we can either get a new customer ourself using a variety of techniques or we can pay an affiliate $60 to get a single sale for the $212 product. Now our simple spreadsheet is looking more complete:
Fixed Monthly costs: $150
Variable Cost per month ($): $2,450 (this is the $98 below times 25 sales above per month)
Fulfillment cost per sale: $38
Marketing cost per sale: $60
Total Variable cost per sale: $98 (sum of two above)
MONTHLY EXPENSES ($): $2,600
Now we add a last line…NET INCOME per month ($)
This is the MONTHLY INCOME - MONTHLY EXPENSES, what’s left over for you the business owner before you’ve paid any taxes. So here is our complete simple example spreadsheet…
INCOME
Average sale: $212
Expected # sales per month: 25
MONTHLY INCOME (sales): $5,300
EXPENSES
Fixed Monthly costs: $150
Variable Cost per month ($): $2,450 (this is the $98 below times 25 sales above per month)
Fulfillment per sale: $38
Marketing per sale: $60
Total Variable cost per sale: $98 (sum of two above)
MONTHLY EXPENSES ($): $2,600
PROFIT per month ($): $2,700
PROFIT per year ($): $32,400 (Before any taxes)
Now, if you’ve set the spreadsheet up right, you can play around with the numbers. Try changing the number of sales per month. Try changing the selling price. Use this as the very simple basis for building a real model of your business… it will become much more complex as you add to it, but it will also become a valuable tool…
(If you don’t know anything about using Excel, you should learn this program. In my opinion, the spreadsheet is one of the most impactful inventions of the 20th Century pertaining to business. Every business owner needs this tool…)
24 Comments 
Business Startup
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• Oct 24, 2008 @10:01 am
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