Testing the Numbers on Your New Business Idea

There is a simple way to test out a new business idea and determine it is worth pursuing further. As you begin, you don't necessarily need the fancy spreadsheets and calculations.

Keep in mind, the following calculation is a simple first start. It is intended to answer the question, “Should I continue to research and flush out this product/service”. 

Eventually you will need those fancy spreadsheets.  They will dig into the nitty gritty that you need to finalize your concepts and/or ideas.

Let’s get started!

We're going to start with your personal household. We all need money to survive and thrive.  How much money do you want to bring home? 

Sure, a million dollars could be your answer, but remember, this is a first step calculation.  You can also swing this the other way and say “All I need to survive is $500”. 

Start with a reasonable number- what you are currently bringing home or what you would like to bring home in 3 years.  This amount needs to be actual cash needed, not a gross amount.

Now that you have that number, multiply the cash needed by 45%.  This is a conservative number for the amount of taxes you will be required to pay. 

Add those numbers together and this is what your business needs to profit. 

Now, let’s talk about the service/product you will be providing.  Here's an example to follow:

New Business Idea: Providing Gutter Cleaning Services

Supplies needed to clean the gutters:

• Upfront Costs:

  • Ladders - $800

  • Attorney - $1600

  • Truck – using their personal truck for business for the first few years

Total Upfront Costs - $2400

• Recurring Costs:

  • Special Cleaning Tools, like brushes - $2500

  • Hoses - $1000

  • Cleaning Chemicals, bulk purchase and only needs to use occasionally - $2000

  • Buckets, trash bags and general supplies - $2400

  • Gasoline for truck - $6200

  • Insurance - $5000

  • Advertising, see line3 under Facts - $15,000

  • Office Supplies - $300

Total Recurring Costs - $34,400

Facts:

1. This person will be starting the business with just him/her until business gets moving and can then hire staff.

2. The business owner has an old truck that they will use to get started

3. Plans to hit advertising very heavy in the Fall as leaves start to fall. Budgeting $2000 a month for September – November and then $1000 the remaining months.

4. Average house takes 1 hour to clean.

5. Average house price is $150.00          

6. They plan on cleaning 6 houses a day due to lost time between jobs.

7. Plans on scheduling cleanings together to reduce travel time.

8. The business owner will take 1 week of vacation.

9. Accepts only cash or checks.

10. Business owner will use savings for upfront costs and does not want pay back.

11. This business owner needs to bring in $120,000 a year to be happy with starting his business.

Tax Calculation:

$120,000 – Cash Needed

X        45% - Tax Allocation

$54,000 – Total expected taxes

$120,000 – Cash Needed

+  54,000 – Taxes

$174,000 – Total Profit needed

The facts are important because they help you calculate your profit, which is the number we are after:

$150 – average price to clean house

X    6 – houses a day

=$900 – a day in income

X  5 – days a week

=$4500 – a week

X 51 (52 weeks in a year – 1 week of vacation)

=$229,500 a year in total income

($34,400)- Expenses

$195,100- Profit

In this example, the gutter cleaner makes more than they desire and so it passes the first test.

Remember that this is just the first step. 

You will also need to research the cost of hiring additional staff and possibly adding trucks to your business.  There are a lot of factors that you need to understand before you make your final decisions.

There is a second step to making sure your numbers work and that is punching holes in the facts you stated above. 

You need to plan for the worst-case scenario to confirm that you will be able okay financially.  This is really just trouble shooting. 

Reach out to some business mentors and have them punch holes in your facts. 

For example, this gutter cleaner speaks to another gutter cleaner in a different state and finds that:

1. They can only cover 5 houses a day.

2. That their average house price is really $165.

3. They find that it is tougher on their body than they expected and takes a week off each quarter.

4. Customers change their schedule or cancel about 10% of the time and so they make sure they have a waiting list to always work from.

5. This gutter cleaner sends automated invoices at the end of each day, so there is an extra $200 a month charge.

It's important to talk to other people in your industry, other business owners for different ideas, and your providers because they hear about issues other people are facing in your same industry.

You can never have to much information!