How to Start Your Business - 10 Week Challenge
In the last week, you created a budget required to lift your business off the ground. This week you estimate the expenses you incur to keep your business running each month.
The activity should be broken into two parts
- The monthly expense you incur
- The monthly revenue you can expect
The monthly expense calculations
The article - How to prepare a budge for your business, guides you on how to go about it. The article contains the activity to calculate the initial investment which you have finished already.
Go through the sections Monthly Expense and Revenue Projections in the article mentioned above. Use the Google sheet for reference(Sheet - Running Expenses).
Here are some tips on preparing your monthly sheet
- Add one item per row
- Add the cost for every item no matter how small
- If you do not know the cost of an item for now, either add an approximate value based on your gut feeling or try to get an idea by looking up online
- Use the checklist of monthly expense items
- Account for the cost of supplies if applicable. For example, a restaurant incurs a supply cost percentage for the food it sells. A software product has a fixed monthly expense for the technology. The spreadsheet example uses a 38% raw material cost(or 62% profit margin).
- Factor in the growth rate. When you start off, your revenue will start at a low figure. Once the name of your brand spreads, the sales increase accordingly. The spreadsheet uses a 6% monthly growth rate.
Estimate break-even period
Now that you know your approximate monthly profits and the total money you have invested, calculate the time required to earn your investment back. The point where you have made your initial amount back in profits is called the break-even point.
Things to remember
Your budget should help you make a realistic decision if your business model seems worth pursuing. There is no good benchmark for the break-even point. Someone running a small restaurant business might expect the return within 6 months while a software product might need 6 years.
Do not panic if the break-even point is too far away. But remember, the further away your break-even point is, the more money you will need to keep the business running. The figure should give you an idea if you have enough cash in handle to handle the monthly burn.