Ensuring Your Micro-business Makes Enough Profit
The fundamental principle of business is simple; earn more than you spend. This is also what’s known as a business model and this article shows you how to find it.
Any micro-business needs to add value to something before selling it on. If the selling price is more than it costs to acquire and add value to it, the micro-business make it a profit. But if the total costs are more than the selling price, the business will cease to exist. This concept, whilst simple, is fundamental to the very survival of your micro-business. The ability of a micro-business to sell more than it spends is its business model.
Creating a business model forces all businesses, regardless of size, to look at what they actually do and how they make a profit. It’s also an extremely useful exercise if you’re contemplating starting a micro-business as it provides an indication of whether it’s likely to be a success or not.
Let’s look at two examples.
1. Generating Money from a Hobby
Mary wants to set up card-making business. She thinks it’s a great idea and will make her a modest living, or at least generate a bit of spare cash. All her friends love the designs so it’s bound to be a success – or is it?
This example takes no account of how attractive the cards actually are or whether they can be sold, it’s a harsh business calculation.
Mary calculates that she can buy materials in bulk for her cards, with an average cost per card of £2.50. She estimates that on a good day she can make a card in 10 minutes. She also estimates that she can sell each card for £4.00. She believes that making £1.50 per card will make her a nice profit.
She then realises that as she can make 6 cards per hour the maximum profit she can make is £9.00 per hour. However, that’s before any time is spent selling the cards, or the cost of creating a web site to sell them or allowing for a retailer’s mark-up. In addition, she can actually only spend 3 hours per day making cards because of other things in her life and the time involved in administration, researching new designs, selling the cards and buying stock.
Mary’s business model calculation indicates that the most she can ever make is £27 per day, or £135 per week. She decides that card making should remain a hobby.
2. Creating a Business
John has a good job with a large firm but wants to downsize and get out of the corporate rat-race. He believes he can help SMEs as a management consultant.
He estimates that £2,500 per month in addition to a voluntary redundancy pay-off would give him a decent living. His research also indicates that some businesses would pay £500 per day for his expertise. John reckons that even with administration, travelling time and selling, he could easily achieve at least 6 paid-days per month which would allow for £500 expenses and the £2,500 income he requires.
John decides to take the plunge and opts for voluntary redundancy.
Comparing Business Models
These two examples demonstrate that a micro-business needs to have a realistic method of making a profit to be viable.
If the figures don’t add up but you still want to do it, then you can try to make it more viable by considering the aspects that make up the business model. For example:
Cost – could you reduce your expenses?
Time – could you find more time for the business, reduce the administration time or produce goods quicker?
Price – is it set at a level that people will pay, but still enough to generate enough revenue? Could you increase the price and also increase the attractiveness of the product by doing so?
If you’re ready to take the plunge and are comfortable with your Business Model, read Essential Marketing Materials to get you started with what you might need, or the other articles in the Setting the Right Course part of Marketing Advice.