Business Planning Considerations: Profitability
Sooner rather than later in the business-planning process, you need to figure out where the money will come from. Who will pay? How much? How often? And what portion of every sale will make its way to your bottom line in the form of — here’s the magic word — profit.
Following are terms that you hear on your journey to profitability:
In the black: If your revenues exceed your costs, you’re in the black.
Red ink: If you’re not in the black, your company is losing money, which means that you could be drowning in red ink.
Fixed costs: Some business costs — office rental or salaries, for example — don’t change often and must be paid on a regular basis, no matter how good (or bad) your company is doing. These are fixed costs or overhead.
Variable costs: Other costs, called variable costs, fluctuate with your sales volume. They include the materials that go into producing and marketing your product or service.
To keep out of the red ink, you need enough money coming in to cover all your costs. But to break into the black, you need to price your goods and services to cover your costs plus a little (or more than a little) for your bottom line. That’s called profit. Don’t leave your business plan without it!
The first step toward profitability is to create a financial projection for your business. Use a form like the one in the figure to estimate costs and revenues.
The example shows financial projections for a restaurant with plans to open in Chicago. The owners are looking for investors, so they want to present a convincing business model as a part of their business plan. In other words, they want to show that revenues will exceed costs and deliver a profit.
On the revenue side, they calculate how much they will make on each meal and how many meals they plan to serve. On the cost side, they enter their fixed costs (for rent, loans, utilities, insurance, and wages) and their variable costs (food, supplies, part-time help, and so on). Their estimates show that they plan to turn a profit of $1,950 a week, or almost $8,000 a month.
Based on their experience in the restaurant business, however, the owners know that their projections won’t turn into reality overnight — that’s part of the reason they want investors. They project that the restaurant will incur losses during the first six months, break even during months seven and eight, and turn a profit starting in month nine.