SCORE counselors in Northeastern New York developed a series of questions for start-ups and established businesses that are considering expanding.
These included five key questions that are numerically driven.
1. How Much Do You Need to Make?
The key concept is “need.” How much is needed to pay for necessities such as housing, food, transportation, current debt, education and health insurance for you and your family?
It is important to understand how this number will change after you’ve run your business a few years.
- Example: Two kids in middle school who likely will have college costs means your business will need to quickly become significantly profitable.
Lots of “break-even” businesses end up closing because they aren’t sufficiently profitable to support a family.
How much you’d “like to make” is a different question about your objective rather than your requirement.
2. What Does the Start Up/Expansion Cost?
It’s critical to build up specific cost estimates for dozens, if not hundreds, of specific costs… accurately.
While it’s probably worse to underestimate costs, resulting in your business launching without sufficient operating funds, being overly conservative can result in an erroneous decision not to launch or under supporting the business as you open.
3. How Much Do You Need to Spend to Generate Sufficient Profitable Revenue?
With rare exceptions, customers don’t find you, at least in sufficient numbers. Even web presence and social media have start up and operational costs, including entrepreneur’s time.
While every industry and situation is different, you need to spend money to help people find you and entice them to try your product or service.
The related misconception is that spending money on marketing is only necessary during start up to generate initial customers. It also costs money to:
- Continue getting new customers since no business has 100% retention; and
- Increase customer retention to drive both revenue and profitability.
4. How Long Can You Survive if Your Initial Volume Is Only 50-75 Percent of Your Projection?
At least where I live, most leases are for a minimum of a year. How much do you need to invest to be sure that your business survives this long and ends the year running profitably? The question is equally relevant to home-based businesses, although their hurdle rate could be lower.
5. How Much Do You Need to Raise?
At this point, you should be able to decide how much:
- The start up or expansion will cost you;
- Reserve you need;
- You can invest; and therefore
- How much you’ll need to raise, if any, from others.
Of course, you may or may not need to raise money, but you at least need to be sure that you have sufficient financial resources to both launch and support the business for at least a year.
Summary: Make sure you ask yourself the necessary questions to get the necessary knowledge you need to have a successful launch.