Chasing a passion for a product or a concept is one way to open a small business. But if the process doesn’t include realistic planning and forecasting, then the owner might end up with a lost cause.
With some businesses – especially retail spaces – rent, inventory and insurance payments can quickly climb into the thousands of dollars. Owners who don’t do their homework to establish realistic revenue projections could be caught shelling out their savings, acquiring debt and ending up with a stain on their personal credit.
To avoid that situation, owners need to identify all their numbers by doing industry research, reaching out to existing business owners and possibly hanging out in a competitor’s space and counting how many customers they have in a day, , said Chris Exton, chapter chairman for SCORE Chapel Hill.
“Let’s start with the expenses,” he said. “There are lots of different templates which will list typical expenses for small businesses.”
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Owners should start there and include the standard expenses, including rent, insurance, utilities, marketing, bank fees and maintenance. Owners should also reach out to others who own similar businesses, possibly in another city or region, and ask about all of their expenses, he said. Expenses should also include a contingency fund, at least 10 percent of the budget, for unexpected costs that will occur.
“That gives you a starting point,” Exton said.
Then owners need to establish revenue projections, from the actual estimated figures drilled down to how much of a product or service they need to sell and how many people need to walk through the door to make that happen.
“You have to make some estimates, and test those estimates by talking to other people in business to get an idea if it is realistic,” Exton said. Owners might even want to consider sitting outside a nearby competitor and counting how many people are going into the shop each day.
Once those revenues figures are established, owners need to account for taxes and credit card fees.
Then owners should take their calculation to friends, mentors and others and conduct what Exton called “the red face test.”
“To make you sure you haven’t embarrassed yourself by leaving something out,” he said.