How much fuel do you have?

by Ashvini on May 10, 2012 · 10 comments

in Business

It’s incredibly easy to start a business these days even in not so business friendly places. All you need is a good business idea and some capital to invest. Most of the entrepreneurs being positively emotional want to get in the action as fast as possible. That means making as few decisions as possible without even looking at the fact that their business will survive for long.

Money in the bank

I probably have been contradicting myself when I say planning is a must and while I also say decisions need to be taken even with insufficient data. There is indeed an element of contradiction because the inherent nature of entrepreneurship. It is often difficult to nail down what will work and what will not. The uncertainty makes it interesting and challenging.

However at one place all uncertainties vanish is how much money you can spend on your venture. Money is finite; so business lasts as long as you have money in the bank. The day your money is over, your business will simply collapse. A lot of them do because they are not able to manage the financial demands.

Entrepreneurs being highly charged individuals often look at the revenue side, while ignoring the cost side of the equation. While revenues are subjective and uncertain, costs are here to stay.

So when you want to start your venture think of how long your business can last without ZERO or insignificant revenues where profits do not cover the costs for a long period.

So if you have X as your monthly expenses and B is the amount of money in your account, your business will last B/X months or even lesser than this ( on a conservative basis) without any significant revenue.

How do you calculate your costs?

Add up everything that you can think of. Your office rent, employee cost, advertising costs, production costs (recurring), shop maintenance costs, electricity, water, taxation, legal and any other expenses. Put a factor of safety like an additional percentage for contingency (may be insurance costs). Remember contingency is part of the risk management and needs to be factored too. Now you have total cost calculated.

What is your budget?

Everything you have accounted for minus the expenses of your daily living without regular income. So if M is the amount of money you have in total in banks and all other liquid instruments and E is your personal expense and if you plan to plan to start making some profit in two years, your total budget for business is

B = (M-12*2*E).

Divide your budget by costs to see how long your business can last without making a single penny. (These are only rough calculations).

If it comes out to be just two or three months, you need to seriously rethink your business plan.

Image: nokhoog_buchachon / FreeDigitalPhotos.net

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{ 10 comments }

Adrienne May 14, 2012 at 9:48 pm

Ah, another great and helpful post Ashvini.

I admit not having all the facts when I ventured into my online business so although it’s the smartest thing to do, sometimes we don’t always know exactly all the steps needed. I hope that doesn’t stop people entirely because I have heard from others that they did the same thing I did and we all learned as we went.

I keep an excel spreadsheet of all my expenses so I know what it takes to run my business. Luckily for me I work out of my home so I don’t have a lot of overhead plus I don’t have to drive to an office. That’s really helped me quite a bit.

Great plan though and outline for those looking to venture into creating a business. I hope they don’t let anything stop them because the end results are so worth everything you have to go through.

Ashvini Kumar Saxena May 16, 2012 at 4:19 pm

Adrienne,

Most of the great business today started really small , out of home, garage, dorm rooms. They always grow from nothing to large organizations. So as a small business owner we all need to be conscious of the costs which fortunately we can control.
A smart management of costs can allow our business to survive longer and more room to innovate.
I think your excel sheet idea is cool. I will probably start doing the same :).
Thanks for your awesome comment once again .

Praveen Rajarao May 14, 2012 at 7:55 pm

Hi Ashvini – This is very well written with all the important factors being considered for the various calculations. I agree with Jens above that not always should one shy away from venturing into a risky business, but of course consider the worst-case scenario if the plans go belly-up.
A little risk every now and then with limited liability will always add more challenge to life and makes one take notice.

Very nice article.

Ashvini Kumar Saxena May 16, 2012 at 4:16 pm

Hi Praveen,
Balanced approach always makes sense and I agree with you . Costs have a tendency to get very high if not planned well however we need to take calculated risks.
Glad that you liked it .

Thanks :)

John Falchetto May 14, 2012 at 4:28 pm

This is the bottom line Ash, the money.

A business which doesn’t produce any, or have any in savings, is dead. Or as some call it: a hobby.

I always tell my clients that they should also plan for the big ‘uncertainty’, the unpredicted medical expenses, or the broken car, or the employee who steals from you.

All these things are harder to take into account, they happen and that’s why you are right we should be prepared for uncertainty.

Ashvini Kumar Saxena May 16, 2012 at 4:14 pm

Hi John,

Really happy to see you here :).

We always need to plan for uncertainty. No doubt most of the entrepreneurs thrive on it , however if they have a cost running their venture, they need to keep an eye on their expenses.

Thanks for your comments and have a great day :)

Jens P. Berget May 14, 2012 at 3:18 pm

Hey Ashvini,

I highly agree with you, but, I started my business with close to 0 money. I have been working hard to get clients, and I have been hustling to make it. It’s been hard, but I really wanted to start my business. And if I was going to wait until I had the money, I probably wouldn’t have started the business in a very long time.

I have read several places that we should have money to make it for at least 6 months. I guess I didn’t do it the way I should, but I’m having a lot of fun and it’s going a lot better than I thought :)

Ashvini Kumar Saxena May 14, 2012 at 3:27 pm

Hi Jens,

I am sure you have done a lot of hard work to be where you are right now . Knowing you , I can also say that you must have planned a lot of things :). In my last venture, I did lose a lot of money despite planning well. Often revenues take a long time to appear and entrepreneurs need to think about that too.
Yes, money need not be an impediment to work and we need to start it as soon as possible

Jeevanjacobjohn May 11, 2012 at 5:32 am

Hey Ashvini,

Great Post.

You did get all technical with the calculations and that’s good. I don’t do business with blogging, right now, so I guess I don’t have any revenue. As far as costs go, it would be around 150 dollars (for hosting). For the last few years, I have been paying my hosting money through blog contests; I plan to do the same thing for this year, because it is more legal for me (Legally, I am not allowed to work in US).

But, still an awesome post. You have summed up everything a business owner needs to do, as far as money is concerned.

Thanks,

Jeevan

Ashvini Kumar Saxena May 14, 2012 at 3:24 pm

Hey Jeevan,

Thanks for your really awesome comment :). Was I technical in this post ? ;) . I think entrepreneurs really need to keep themselves aware of the cost side while they make worthwhile effort to increase the revenue. It gets more complicated when you have employees and other costs. In that case often to survive we need to plan well on the cost side.
You are doing the things right if you can manage your costs with your income :).
Thanks for commenting and have a great day :)

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