When starting a small business, you should look for three things that will help you in its success:
1) Is the product in demand: This is usually a function of how much value your prospective customers see in the solution offered by the product or service. Look for products or services that match up well with issues that face a sizable number of people. The larger the potential market, accompanied by the amount of value the product or service brings to this market, the better the chances of the business being a success.
2) Does the business have a reachable break even point: In order to achieve profitability, businesses must surpass their break even point. This is the amount of sales needed to cover both the variable and fixed costs associated with the business. The amount of sales beyond this point is what contributes to the business’ profitability. To determine the amount of units needed to reach break even, take the price you’re going to charge for the product or service and subtract the variable cost associated with that unit (an example would be CTi’s Hallmark System’s price is $7.00 per square foot and it’s costs for materials and labor (variable cost) is $2.00. Take this number and divide it by the amount of fixed costs associated with the business; these are the costs that don’t go up or down with the amount of sales you make (an example would be rent). To continue on with our example, if we have a selling price for the Hallmark System of $7.00 per square foot and variable costs associated with it are $2.00 per square foot, and if the fixed costs associated with running the business are $80,000 per year, our break even would be 16,000 square feet (7-2/80,000) = 16,000. This means the amount of square footage installed for the year above the 16,000 now contributes to the business’ profitability.
3) Is the business scalable: Can you adjust how much your business can do easily? This is normally a function of how skilled the labor needed for the business is, how expensive is it to get new customers, and how easy it is to manage the business’ growth? A new business is normally a function within a person’s life. You need to determine how large a business needs to be in order to meet your financial obligations and then look at how much you have to do in order to achieve this size business. Does that amount of work fit into your overall lifestyle comfortably or will you be married to the business in order for it to produce what you need.
