Why is it that we put so much emphasis on a business plan? The goal is to be able to determine if you have a viable business. What is a viable business? A business that is freestanding, self-sustaining, capable of making it without outside financial support. That means no credit card debt, no loans, just the business itself, standing alone, able to meet all the expenses from the transactions of the business.
Before a business becomes a viable business it is a fledgling enterprise surviving on external capital. As long as you’re tied to external capital, the focus needs to be on building the business you started to build. You have to be careful about experimenting with new products or services until you’ve expanded your basic business as far as it can go. You can’t afford to experiment. You don’t have the time or the money. You’re living on limited capital. You have to do everything you can to reach viability before your capital runs out.
After your business is viable – not just on paper – but in real life, you’re living off of internally generated cash. There are profits to put in the bank or reinvest in the business. You have the luxury of trying some experiments because you are playing with your own money. You can take a few chances without putting the entire business in jeopardy.
Do viable businesses fail? Absolutely they do. The owners can get reckless when the fear fades and the emotion of excitement takes over. They get reckless and jump on new opportunities that are too risky. They stop watching the numbers. Numbers help balance emotions. The cash flow may be self-generated, but it is still not unlimited and it can still run out.
Gross profit is one of the most important numbers in any business. It determines the amount of capital you need, the volume of sales, the overhead you can afford, and the time it will take to reach viability. What do you need to get to gross profit? You need the cost of goods sold or the cost of sales. Subtracting the cost of goods or cost of sales from total sales and you have your gross profit in dollars, or as a percentage of sales – your gross margin.
You pay all your expenses out of gross profit – salaries, rent, phone bill, gas, electricity, internet…. If your gross margin is 10%, you need $10 in sales for every $1 of expenses just to break even. If your gross margin is 40%, you need only $2.50 in sales for every $1 of expenses.
The higher your gross margin, the fewer sales you need to cover expenses and the longer your capital will last.
Is your business viable yet? The CBI exists to help you get to viability and beyond. Make an appointment for a coaching session and brainstorm ideas of how to get to where it is you want to be. 931-456-4910. I look forward to working with you.
