The Financial Factor




So, you have a cracking business idea.  Is it commercially viable?  Is the idea worth anything? Will it make you enough money to cover set-up and running costs?  Will it produce enough profit to satisfy your business and personal requirements? Essentially, will your idea create enough income through sales to give you a living and be an attractive proposition to investors or for banks and other sources of finance to provide the initial resources you need?

Here the question relates to creating wealth – not about how you choose to spend it.  Whether a charity, a social enterprise or commercial entity the challenge is the same: you need to run a venture that generates money.  The pre-start-up phase is where your calculations begin, where you set costs against selling price to determine a sales margin, your profit margin.  Creating and controlling finance is not just an arithmetical exercise, money is the ebbing and flowing lifeblood of a business. Money is the temperature gauge of success for your business model.  Rarely does a business get it correct at the outset.  The aim is to prepare properly beforehand to minimise mistakes and maximise the chance of success.

Begin by setting a range of selling points to calculate a sales margin.  This process is essentially the same whether selling a product or offering a service.  To keep things simple let’s assume you have a selling point of £1.  Production costs total 60p, leaving 40p, giving a 40% profit margin.

If we assume your annual production costs are £10,000.  To find your breakeven point, divide £10,000 by 40% = £2,500 and multiply by 100% = £25,000.  As the margin is only contributing 40% you need to recover a further 60% to breakeven.  Sales above breakeven contribute to gross profit.

If you are selling a service, for example your personal professional or trade skill you need to set an hourly or daily rate then calculate how many days you need to work to cover costs and move into profit.

Breakeven is reaching first base.  The sales forecast above and beyond the £25,000 touch point is the figure, that if realistic, will be of particular interest to potential investors.