Learn Your Numbers
(YoungBiz.com) - When it comes to starting a business, you want to choose one you'll enjoy--you figure, if you're going to spend long hours at it, it's important to like what you're doing. But to avoid the trap of remaining at hobby status--and an expensive one at that--your business has got to have the potential for profit. Here's how:
- Get a grip on hidden expenses. You know that when you make a purchase at a store, the store's owner makes a profit from the sale. But how does he or she determine how much that profit is? Is it simply the retail price of the item minus its wholesale cost?
That's part of the equation. But in order to truly know what your profit is, you must also figure in your operating expenses. Operating expenses are the ongoing costs of doing business each month--costs such as rent, utilities and salaries that do not vary according to the number of sales you make.
Before Erin Ozanne, 18, owner of Clothes for the Soul in Binghamton, New York, launched her business two years ago, she talked to her parents about what her operating expenses would be. "We sat around the table and figured [it] out," she says.
In addition to the cost of servicing her sewing machines, Ozanne discovered other hidden operating expenses. For example, she sometimes sells her fashions at music festivals and college campus events. "We even had to figure on the cost of gas to make the trips," she says.
- Don't be surprised. In order for a business to be successful, you must be able to cover your operating costs each month. At first, Erin didn't make a profit--mainly because of high start-up costs--but now she factors her operating expenses, as well as the costs of materials and labor, into the retail price of her clothing.
As you carefully monitor your cost of goods and operating expenses, you may be surprised at how expenses can mount up. That's what happened to 16-year-old Tyrone Gray, who owns a printing business in Kokomo, Indiana.
Nearly two years after starting his company, Gray decided to move his business out of his home and into a high-traffic storefront. He estimated his monthly operating expenses would run about $2,000--until he actually sat down and figured out all the costs. "It surprised me that it added up to $4,100," he says.
- Go for the goal. Keeping a tight rein on operating expenses has helped Ozanne reach her goal of getting into a storefront, and she believes these same budgeting skills will help her reach the next goal of having a shop that is entirely her own.
Like Ozanne, Gray uses his operating expenses for setting goals. "Knowing your operating expenses ahead of time," he says, "you just have to do everything in your power to reach that level."
Though $4,100 in monthly operating costs is a large number to shoot for, Gray was able to meet his expenses and net a monthly profit of $1,000. Knowing that he had to meet that goal, Gray began to brainstorm on how he might generate additional sales. He decided to add cell phones and pagers to his list of services, which added extra revenue without increasing his monthly operating expenses.
- Know your numbers. Tracking your business's operating expenses as well as your cost of goods is an essential ingredient in building a strong foundation for your company. When you calculate your monthly expenses, double-check to make sure you haven't overlooked anything. Then, let the numbers tell the story. Not only will they give you an idea of where your business stands right now, but they'll also tell you whether you're headed in the right direction.