Will your big idea make money?
As part of our Financial Fitness month, we’re been talking about starting your own business. And every business, big or small, needs to make a profit. Otherwise, it won't be in business for long!
So before you embark on becoming a business mogul figure out if your super cool millionaire-in-the-making business idea can make money. It's a lot cheaper to tweak your idea on paper than to fix an expensive mistake once you're up and running!
What is profit?
The difference between the money that comes in (income) and the costs of running the business (expenses) is your profit. Here's two examples of how you would figure this out for a business that sells a product (pies), and a business that sells a service (bedroom organization):
Assume you can sell three pies each month at $10 per pie
TOTAL INCOME = $30 / month
Calculate your expenses for each unit, or in this case each pie, for one month. The total cost of ingredients might be $18.96 but you'll get six pies out of those ingredients. For advertising you distribute flyers around your neighborhood.
- ingredients = $18.96
- flyers for the month = $4.20
TOTAL EXPENSES = $23.16
Divided your total expenses by the number of pies you made for the month = $23.16 / 6 = $3.86 per pie
PROFIT = $10 income per pie minus $3.86 expenses per pie = $6.14 per pie
Great! You're making a profit on your business, and dare we say…it's as easy as making pie!
Estimate it takes 3 hours to organize a bedroom @ $10/hour
Your expenses for a service-based business are easy—it's just your time. So how much do you think an hour of your time is worth? $5? $10? $20? Consider how much other teens get paid for hourly work like babysitting and hamburger flipping. Maybe you charge a little more since you have an area of expertise?
As you can see, starting a business that offers a service doesn't cost much to get started, if anything at all. These businesses are great for young entrepreneurs who don't have access to resources, but have a great desire to make money.
Figure out if your idea for a business can earn a profit. Research how much it costs to make one of your products or offer one hour of service. Then make some assumptions about how much your customers would pay, and how many you could sell each month. If it doesn’t look like you can make a profit try adjusting things. Can you get materials cheaper? Can you charge a higher price? Keep moving stuff around until you come out with a positive number. If it’s still not working, try another idea or get some advice. At this point, you have nothing to lose.
Follow our Financial Literacy Month series to get financially fit in just 30 days.
James McKenna and Jeannine Glista are the co-creators of Biz Kid$, a national financial education initiative based on the award-winning public TV series. They also are the authors of the seriously smart new book How to Turn $100 into $1,000,000 (out this month from Workman Publishing, $13), which outlines in detail every step you need to take to make your million.