Profitable business ideas are what all of us would like to find - after all, there’s not much point in an unprofitable one, is there! But just how do you tell beforehand if a business idea is going to be profitable?
The short answer is that you can’t be absolutely certain. All kinds of circumstances can trip up even the best idea, from health issues to hurricanes to hype. However, you can take steps to evaluate the profitability of an idea you’re considering, in order to compare it with others and to see if it meets your business goals.
In a nutshell:
profit = income - expenses
Where income is all the incoming money (sales, interest earnings, commissions, etc) and expenses is ALL the expenses (labour, materials, services needed, taxes, information, everything you spend money on). The interesting part is finding the numbers which best describe the income and expenses, and making sure you haven’t forgotten any!
The tool you need is a “pro-forma (or projected) profit and loss (or income) statement“, which is typically part of a business plan but is extremely important even if you don’t intend to make a formal business plan. You can see some examples here:
Pro Forma Profit and Loss, or Income Statement
Business Owners Toolkit - Projected Profit and Loss Statement
Any business plan book, software package or online tool will help you create a simple statement like this. The difficult part is getting reasonable numbers to plug into it. Only you can work out what the numbers are for your specific business idea, but a couple of points are very important:
- be pessimistic, not optimistic in your projections
- include all the expenses you can think if - and research to discover the expenses you don’t yet know about.
The HBIME training program helps you evaluate ideas against your personal and business goals in this and many other ways.
