After working out how much you will sell in the first twelve months, you can work out whether the business is likely to be viable. Viable means that it will make enough profit, within a reasonable time, to satisfy your expectations and allow you to live on it; also that it can sustain itself and grow in the future.

Sales figure

The amount of money due to you from the products you sell in the first year is your annual sales figure. You need to have an idea whether you can make enough products to meet the estimated sales. If you cannot, then you must reduce the sales figure to what you can supply. You must also consider the limitations of storage space and the amount of money required for the purchases and raw materials needed to support the estimated sales.

Costs

From your sales, deduct the amount it will cost you to produce the product. For this you need to calculate the hours of labour will be used directly on the product and how much per hour you pay. This must include your own hours of labour used directly on the product, at the rate you would pay someone else to do the same job. Then estimate the cost of raw materials, bought-in parts or components, etc, and make an allowance for waste and expendable tools or lubricants- in fact any expenditure that directly varies according to the number of products you make. Add these costs and the figure you now have is called the direct costs. Deduct this figure from your sales figure and you now have a figure called your gross profit.

Expenses

Overhead or indirect expenses are expenses which do not vary directly wit the volume of sales or production. Make a list of all the expenses you will have to incur to support the business, other than those you have included in direct costs.

Financial charges– At this stage guess at what money you would borrow from the bank, assuming you get a loan, and allow 15 per cent of the amount as financial charges.

Insurance– You have to consider how much insurance you need so that you can put a suitable amount for premises into you expenses calculation and know that you are properly  covered for reasonable risks.

Deprecation– This is an allowance you set aside each year to replace capital equipment when it needs replacing. At this early stage you can allow an annual deprecation figure of 25 per cent of the value of the vehicles and 10 per cent of the value of everything else. Capital equipment is all items of a more permanent nature which are essential to the business but not part of the trading activity.

Net Profit-Add up all your expenses and deduct the total from the gross profit. This will give you your net profit before any tax.

Judgement point

If the sum is not too great a loss in the first year, and you expect second year sales to be substantially greater without too much increase in expenses, then that is fairly normal business start-up pattern. If there are serious anomalies then you should consider taking some counselling.