• This approach calculates the necessary sales to generate enough profit to meet personal living expenses, debts, and minimal business reinvestment. Determining Profit Requirements 1. Personal Living Needs: Calculate the minimum amount you need to withdraw from the business. If you have other income sources, you can adjust this figure accordingly. 2. Loan Repayments: If you plan to borrow startup funds, include projected loan principal and interest payments in your income requirements. • Example: For a $30,000 loan over 5 years at 15 percent interest, monthly payments would be approximately $713.70, or about $8,600 yearly. 3. Total Minimum Profit: Add living expense withdrawals plus loan repayments to get the minimum annual profit needed to sustain yourself and stay current on debts. $8,600 represents the total interest and principal repaid on the loan the first year of operation. Estimate personal living expenses to be withdrawn from this business at $15,000. You have a total of $23,600 which must be generated to sustain your personal needs and keep current with the lender. Calculating Required Sales Using industry data (e.g., from ProSight Statement Studies, Dun & Bradstreet , industry norms), identify an expected profit margin including owner’s draw (e.g., 11 percent). • For example: Minimum profit needed = $23,600 Expected profit margin = 11 percent of sales Required sales X satisfy: 0.11 × X = $23,600 X = 23,600 dividved by .11 = $214,545 This calculation provides a minimum sales target to assess feasibility. Market Research to Validate Sales Targets Verifying if this sales target is attainable requires thorough market research: • Define your business and industry context, including product or service offerings. • Analyze market size, customer demographics, and purchasing behaviors. • Identify and assess competitors’ strengths, weaknesses, pricing, and market share.
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