Let’s assume you have a good description of your proposed business, and the business is an extension of something you like and know how to do well. Perhaps you have been a chef for ten years and have always dreamed of opening your own restaurant. So far, so good—but you aren’t home free yet. There is another fundamental question that needs answering: Does the world need, and is it willing to pay for, the product or service you want to sell? For example, do the people in the small town where you live really want an Indonesian restaurant? If your answer is “yes” because times are good and people have extra money, ask yourself what is likely to happen if the economy goes into a slump ten minutes after you open your doors. To make this point more broadly, let’s use a railroad train as a metaphor for our economic society. And let’s have you, as a potential new businessperson, stand by the tracks. How do you deal with the train when it arrives? You can get on and ride. You can continue to stand by the tracks and watch the train disappear in the distance. Or you can stand in the middle of the tracks and get run over. To continue this metaphor, let’s now assume the economic train has three engines: taste, trends and technology. Together they pull the heavy steel cars which can give you a comfortable ride or flatten you. Let’s take a moment to think more about each of these engines.

1. Taste People’s tastes drive many of the changes our society speeds through. For example, in the 1970s, many of us changed our taste in automobiles from large gas guzzlers to small, well-built cars. American manufacturers didn’t recognize this change in taste until they almost went broke. The Japanese were in the right place with small, reliable cars and realized great prosperity. Consider popular music as another example. Music styles change every few years, and some bright businesspeople succeed by selling clothing and other accessories associated with each new music style. What does this mean to you? Look at your business idea again. How does it fit with today’s tastes? Is your business idea part of a six-month fad? Are you going into something that was more popular five years ago than it is now and is declining rapidly? If so, you are likely to go broke no matter how good a manager you are and how much you love your business.

2. Trends It’s one thing to understand that people’s tastes have changed and will undoubtedly change again and again, but it’s a lot harder to accurately predict what will be popular in a few years. I wish there were a central source of information about predicting future trends in any field, but there isn’t. You have the task of looking into the future and deciding where it is going and how that affects what you do today. Fortunately, a little research can do wonders. Here are some tips on how to proceed. Read everything you can about your field of interest. Attend trade shows and talk to people in small businesses at the cutting edge of the field. Talk to people in similar businesses. Read back issues of magazines aimed at your proposed field. Your goal is to know enough about your proposed business to spot the trends that will continue into the next decade. For example, if you’re interested in opening a night club from the 1950s featuring a piano bar, mixed drinks and lots of room for smokers, you should know that the consumption of hard liquor and cigarettes has gone down sharply in recent years and that certain types of reduced-smoke lounges with wine and imported beer are doing very well. Putting this information together with other factors, such as your anticipated location and target customers, should give you a pretty good idea of what drinks you should offer. You might decide to serve a number of varieties of fine wine and imported beer and forget about a hard liquor license altogether.

3. Technology This is a fancy name for the new items just coming out on the market. Technology is your innovative kitchen appliance, your home computer, NASA’s new spacecraft and even the proverbial better mousetrap. For example, lots and lots of people are working feverishly to come up with better video games, laser toothbrushes, wristwatches, TVs and the like. Sometimes it takes years to perfect an item. That can be good news for small businesspeople, as there is plenty of time to prepare to profit. Perhaps you’ve heard of satellite telephones. This is the new telephone technology which will transmit and receive directly from your telephone to a satellite. Satellite telephones obviously will require large amounts of capital and can produce great profits. Some people will surely profit handsomely from the opportunities that arise. Of course, there is a downside to new technology, too. It often involves high risk. There’s no guarantee of success just because the product is new. In fact, something like 80% of the new products introduced into the marketplace die a quick death. Remember 3-D movies, the Edsel and eight-track tape players? What should you do to take advantage of new technologies?

First, recognize that large-scale new technology ventures require vast amounts of money and will be beyond your reach unless you plan to have your small business grow in a hurry. Many companies expect to lose money for years during product development and approval before developing a big hit. However, there are often ways creative small businesspeople can find to participate in new technological trends. For example, many computer software companies started with little more than a good idea and a computer. Or to think even smaller—but not necessarily less profitably—lots of carpenters have done well making ergonomically correct furniture for computer work stations. Pay attention to new developments in your chosen field and think about how you can take advantage of them. With all the camcorders being sold, many people will make a good living repairing them. Maybe that’s a good business for you. Or, if you plan to open a television repair shop, you should know that in the next few years many, if not most, new televisions will have HDTV technology. If you are the first TV shop to specialize in that technology in your area, you may do very well. In short, new technology is a mighty engine that can pull the economy in new directions at terrific speed. Be sure you are riding on the train and not picking daisies on the tracks in front of it.

4. Write a Future Trends Statement the broad movements in the economy that can affect your business idea. Also, remember that there are similar trends in your local community. It’s at least as important that you pay attention to these. For example, perhaps you live in a farming community with no manufacturing industries and many migrant workers. It is unlikely that a high fashion clothing store would do well there, but you might do very well selling a new lighter, stronger, cheaper work boot, or chain saw, or stump puller. Write down your first thoughts about what trends affect your business and where they will be in five years. Nobody expects a perfect forecast, but most financial backers want to know that you have thought through how your business will fit into the world in the next few years.

Future Trends Affecting Antoinette’s Dress Shop There are two conflicting trends affecting my business. First, more women are entering the workforce. However, women increasingly must work to pay for family necessities rather than to make money for extras. For my business, this means that professional working women will appreciate even more in the years ahead the extra service and convenience that we offer. Second, as the baby boom matures, the number of women in the age group that enters the workforce is declining. This means that I cannot count on an ever-expanding population base for my business. To accommodate these trends, I plan to pay attention to my customers’ changing tastes as they grow older. I also intend to find new ways to market to the smaller number of younger women entering the workforce.

F. Break-Even Analysis: Will Your Business Make Money?

Some people have a bigger problem than others when opening a new business. These are folks who are positively enamored with their business concept and are desperately eager to begin. They are so smitten and eager to start, they have no patience with the economic realities involved in their business. If you recognize this tendency in yourself, it’s extra important that you prepare a financial forecast carefully and pay attention to what it tells you. This step tells you whether your idea is a sure winner or a sure loser or, like most ideas, whether it needs work and polishing to make it presentable. How can you tell if your business idea will be profitable before you implement it? The honest answer is, you can’t. This essential fact makes business scary. It also makes it adventurous. After all, if it were a sure thing, everyone would go into business. Just because you can’t be sure you will make money doesn’t mean you should throw up your hands and ignore the whole problem. You can and should make some educated guesses. I like to call them SWAGs (“Scientific,” Wild Ass Guesses). The challenging part is to make your profit estimate SWAGs as realistic as possible and then make them come true.

The best way to make a SWAG about your business profitability is to do a break-even forecast. Although a break-even analysis or forecast can never take the place of a complete business plan, it can help you decide if your idea is worth pursuing. Most financial backers expect you to know how to apply break-even analyses to your business. Your backer may ask what your profits will be if sales are slightly higher or lower than your forecast. Many experienced entrepreneurs use a break-even forecast as a primary screening tool for new business ventures. They won’t write a complete business plan unless their break-even forecast shows that the sales revenue they expect to obtain far exceeds what they need just to pay all the bills. Otherwise, they know their business will not last very long.

Warning

You can use this technique as a “quick and dirty” profit analysis, but don’t use it as a substitute for the full profit and loss forecast presented in Article 6. A break-even forecast is a great screening tool, but you need a more complete analysis before spending any money.

NoteProject development note: The break-even analysis described below does not apply to a project development, since only one sale occurs. This exercise is designed for a continuing business with ongoing sales revenue. Before they begin, developers must know how much profit they will make after the project is completed. A developer prepares a break-even forecast every time she calculates the likely sale proceeds and subtracts estimated costs. Developers can skip this section, unless they need a refresher course on break-even analyses. To complete a break-even forecast of your business, you’ll make four separate estimates:

•Sales revenue. This consists of the total dollars from sales activity that you bring into your business each month, week or year.

•Fixed costs. These are sometimes called “overhead” and you must pay them regardless of how well you do. Fixed costs don’t vary much from month to month. They include rent, insurance and other set expenses.

•Gross profit for each sale. This is defined as how much is left from each sales dollar after paying for the direct costs of that sale. For example, if Antoinette pays $100 for a dress that she sells for $300, her gross profit for that sale is $200.

•Break-even sales revenue. This will be the dollar amount your business needs each week or month to pay for both direct product costs and fixed costs. It will not include any profit.

WarningMath alert: The following section requires that you make some simple mathematical calculations, which you’ll use to analyze your business before writing a complete plan. If the very thought of math makes your head spin, you’ll probably want to find someone to help you.

1. Forecast Sales Revenue Your first task is to estimate your most likely sales revenue by month for your first two years of operation. This is both the hardest thing to do and the most important part of your business plan. Much of your hope for success rides on how accurately you estimate sales revenue. Keep in mind that you’re honestly trying to decide if your business will be profitable. This means that you must base your forecast on the volume of business you really expect—not on how much you need to make a good profit. If you estimate sales too high, your business won’t have enough money to operate. But if you estimate sales too low, you won’t be prepared or able to handle all the business you get. Appendix 4 contains a Sales Revenue Forecast form, where you can fill in your estimated two-year monthly sales revenue. Depending on the type of business, you may also choose to fill in the number of units you expect to sell. Here are some methods different types of businesses use to forecast sales revenues. NoteYou may decide to round off your forecasts to the nearest $1,000 instead of writing out each single dollar amount. For instance, a monthly sale of $33,333 would become $33,000. After all, these are guesses, and it’s hard to guess at single dollar amounts when you’re in the five-figure area.

a. Retail Sales Revenue Forecast The simplest way to forecast retail sales revenue is to find the annual sales revenue per square foot of a comparable store. Then multiply that dollar figure by your estimated floor space to derive an estimate of your annual sales revenue.

Example: A similar business shows $200 of sales per square foot per year. If you have 1,000 square feet of floor space, your estimated annual sales revenue will be $200,000 (1,000 x $200). Naturally, your estimate should take into account everything that makes you different from the other store.

Sales Revenue Forecast for Antoinette’s Dress Shop Antoinette wants to open a 2,000-square-foot dress store in a downtown shopping mall. The shopping mall manager says that women’s clothing stores in the mall average between $200 per foot and $250 per foot per year. After checking with other clothing retailers, reading trade magazines, visiting similar stores in other cities and integrating her own experience in the business, Antoinette decides that she can achieve the $250 per foot per year figure. This means her annual sales should be $500,000 (2,000 x $250). To be conservative, she plans for the first year’s sales to be about 20% below that level to allow for her business to build. This means that first-year sales will be about $400,000, or $200 per foot. Because Antoinette must forecast monthly sales for the first two years, she now has to decide how the sales revenue will occur each month. She could simply divide this $400,000 by twelve months and get $33,333 per month. But in the dress business, Antoinette knows, this would be inaccurate. In women’s clothing, there are four sales seasons: spring, early summer, fall and Christmas. The kind of shop Antoinette plans to open is slow in mid-summer and in January and February. Antoinette also figures that sales will be a little lower than the average for the first few months until her advertising campaign catches on. Antoinette’s monthly sales add up to $401,000 for the first year, so she reduces the December figure by $1,000 to make a nice, round $400,000.