In this week’s post, Dr. Business tells young entrepreneurs about the first thing they need to figure out when starting a business….and it isn’t what you think!
This week’s question: What is the first analysis an entrepreneur needs to perform?
Dr. Business says:
You would think that anyone starting a new business would have a business plan – right? Wrong!
An even more basic is the need to develop a break-even analysis for their first year in business. When you consider that most entrepreneurs are using their own money and money that they have convinced relatives and friends to invest, shouldn’t they at least do some analysis as to how are they going to recover that investment, and at a minimum break-even for that initial year?
Every new business requires two levels of investment. The first just to get ready to do business, and the second the monies required to operate the business after you have opened the door. Even if you are only developing a new App, it costs money and time to develop and test the App. Then it requires more money and time to market the App. Hopefully, you will generate enough revenue from the App to cover these investments of time and money during the first year of operations. If not, then obviously you have lost money.
The question then is do you have enough money to continue the business? The statistics are that most new businesses fail within the first 12 to 18 months. Why is that? Primarily because there was no plan and as a result the founders ran out of money.
Let’s take something as simple as opening a bagel shop or pizzeria as an example. First, space has to be leased and constructed to accommodate the equipment required to make bagels or pizzas. Then, the equipment has to be purchased, installed and tested. After which, the rest of the space has to be developed to accommodate customers, as well as adding a phone, fax, computer, and other equipment. This represents the initial investment just to be ready to make bagels or pizzas. Then ingredients have to be bought, employees hired, menu’s created, and some marketing and promotional materials developed to let prospective customers know you are in business. Once the doors are open, this second level of investments have been made, and will continue to accumulate as operating expenses.
Now the founders have to determine how many bagels or pizzas they have to sell every day, week, and month, to cover all the money that has been invested just to break-even, and is that possible? The question also remains “why should customers buy your bagels or pizzas, as compared to those of all of your competitors nearby”?
As this example illustrates, the planning that has to be done for any new business just to determine if it can break-even in the first year of operations is critical. It also demonstrates how easy it is for entrepreneurs to fail without doing this basic exercise before they begin.
Have you ever thought about how many bagels or pizzas your favorite bagel shop or pizzeria has to sell every day to make any money?
There is an old maxim: Nobody plans to fail…the just fail to plan.