I know this is basic, but I love entrepreneurs, and this just seems to be something so many people miss. Let me give two examples.
- A gal thinks about how much markup (profit margin) there is in auto parts. So she opens an auto parts store. She is dreaming about buying a part for 10$ and selling it for 15$; 50% return of investment! Can’t get that at a bank! But she just can’t seem to sell enough parts to scratch up enough money to pay for the building, the utilities, and yes, more parts! She has good margins, but the volume is too low.
- A guy thinks about how many mowing lawns, and he gets more customers than he can possibly get around to, so he is thinking about that money he will get for every lawn. But after gas money, keeping his lawnmower fixed, and other expenses he realizes that he’s just not making any money; even though he is mowing a lot of lawns. He has high volume, but the profit margin is too low.
So, please, you entrepreneurs out there, when you are thinking about a business, please estimate all your expenses, and please estimate both your margins and your volumes, and make sure you are going to generate enough actual $$ to make a go of it.
I don’t have space here, but don’t forget about tax laws about losses, and about the possible tax benefits of doing something you really enjoy, as a business. Those factors could tip the scale for you.
Get out there and “entrepreneur something”! But do a little math before you get started!