Don’t start a business until you’ve done the math.
If you’ve done your homework, as outlined in part one of this multi-part essay, then you have created a list of the types of things for which you have a passion. The list should be general in nature, as the execution part of this process has yet to be described.
With your list in hand, it’s important to assess the few things for which you have passion in a more objective manner. I call this part of the process, the “Do the Math” exercise. Specifically, it’s important to understand in round numbers if achieving your financial goals can be met by leveraging your passion in a reasonable amount of time and resource allocation. Generally, this is possible (only in the good old USA).
Here’s an example, I mentioned snow cones in part one of this essay. Maybe you grew up loving snow cones, and the very idea brings back such happy memories, that you have centered your thinking on snow cones. Further, you have some experience that lends itself to this concept, either experience or skill-based. So, snow cones it is for now.
Here’s the simple math questions you’ll need to answer: (1) how much will it cost in raw materials to deliver the type of snow cone you plan to sell? (2) How many reliable supplies of raw materials are available in the area where you will set-up your business? (3) How much money would you like to make from your venture (and therefore, how many snow cones do you need to sell)?
At the center of these questions are several fundamental issues. In question one, I’m focusing on raw materials costs. In questions two, I’m trying to understand reliable supply and supplier pricing power. And, in question three, I’m testing the desired outcome of the entrepreneur (and the resulting sales velocity needed to succeed).
So, if a snow cone costs $.20 in raw materials only, and each snow cone sold on average costs the consumer $2.70, we know that we have $2.50 per snow cone in which to allocate sales costs, labor, and other overhead into our profitability calculation (done later). We also know after some research, that there are four local suppliers of commercial ice that appear to be reliable, and that the flavors we seek can be sourced both locally and through Internet purchases with short lead times. Finally, we decide that we’d like to make $250,000 per year from our venture for now.
Here’s the math: With reliable and stable supply, at $2.50 per snow cone, we’d need to sell 100,000 snow cones per year (not counting sales, rent, labor, and overhead costs) to meet our $250,000 goal. That’s also 8,333 snow cones per month, 2,083 snow cones per week, 298 snow cones per day, or 30 snow cones per hour, each hour of a 10-hour day. To be fair, I’d suggest you add nearly 50% or more to those numbers to account for all the costs we’ve left out of the math thus far. With this math in hand, I’d suggest we take a good look at the various methods that might facilitate the pace of business we’re looking to achieve, while keeping in mind things like seasonality and weather, population density, demographics, and disposable income to name just a few critically important issues that effect sales velocity.
In this analysis, we also can assess what kind of structure we might need to achieve our goals. For instance, if we needed to sell 1,200 snow cones per hour to succeed, we’d know immediately that this business would require some initial scaling to meet the financial objectives – most likely 4-5 snow cone trucks, employees, insurance, accounting/tax support, and so on. The cost of doing business just went up substantially! This is why it is vital to do the simple math prior to starting a business.
Therefore, your homework this week is to do the math. Next week, we’ll talk about how to deal with these numbers, and I’ll introduce the acronym MECE and the tem benchmarking. This may seem difficult, but once you start the process, the concept will likely fall into place for you. Do the math!