Can some on layout all the cost of doing business?

[Davidl]

typically how much of a margin is reasonable for a product to sell for in order for the company to sustain. Now that I'm thinking about it how do companies overcome having to pay so much for the necessities to run a business and turn a profit??

Ex. selling shoes for 130 dollars made in america after every cost is accounted for is 50 dollar margin too small or would typically companies prefer for the margin to be near $70-80 for the ability to expand faster, granted that the output was a 100- 150pairs a week.

Besides the cost of materials, employee wages, taxes, accounting, cost of keeping the building running, marketing what are the other costs that aren't so obvious and how are they calculated.

Ex. insurance for company equipment and employees, 401k. Are there any more that I'm not thinking of?

[Harold Mansfield]

We can't really answer that for you because we don't know your operating expenses, and how much you need to live. Especially not from an example. Each business is different with different expenses. You need to figure out how much volume you need to do to be profitable at those margins. It's not the same for everyone, even people in the exact same industry.

The one thing I will say is that there are expenses that will come up that you can't prepare for, because there's no way to know what they will be for you. Just don't under estimate marketing. Without it you won't do the volume and sales that you need to be profitable. Marketing is a broad term that covers a lot of unforeseen expenses and set backs, especially if you're learning as you go. You will almost always not get it correct right away.

[Patrysha]

I've recently discovered the benefits of doing cost-benefit calculations to figure out the combined and variable costs for a business. There are plenty of templates online (I downloaded one for Excel and have used it for a variety of projections)

[Davidl]

A better way to put it is how much should a business have in available cash after paying all expenses to be able to sustain. Lets say a startup company A makes 20k(after taxes) in a year and all expenses = 10k. They can survive another year (10k net profit after taxes)without making sales at minimum or longer if they downsize. If any extra expense come up its could jeopardize the company.

Is that the bare minimum for a company starting out to aim for or does a company look to get at least 3 or 4 times expenses at minimum to even sustain and start to expand as sales start growing.

Also are there any other things like 401k, insurance ect that most people wont know until they get involved in a business?

[TAAccounting]

David,

This is a question that I deal with on an everyday basis -- I am accountant who function as both an Operational Accountant-Consultant & Outsourced CFO.

The question you are asking is difficult to answer without actual numbers attached. But I can provide you with "Best Practice" and things I've seen out of my personal experience.

So taking your shoe example:

Revenue: $130
Costs: $80
Gross Profit: $50
Expenses: <unknown -- need to be calculated>
Net Income: <unknown -- need to be calculated>

Your gross profit margin is "Gross Profit/Revenue = Gross Profit Margin" which in this case is 38.46%

This means, after costs, you are only making $0.38 on the dollar.

We can assume you need a 10% Net Profit Margin in order to break-even. So that means, you are left with 28.46% for expenses.

Now, the translation and explanation of all the figures.

Is this business model sustainable as a small business?
-- It is absolute possible, though not recommended. From my professional expertise, your gross profit margin should be closer to 59% in order to have sufficient cash flow to handle your expenses and wiggle room to compete with competitors. This holds true for most companies. Failing to do 59% does not necessarily mean you're doing bad, it just means that your cash flow will take a heavier burden in order to maintain your company inventory and costs of goods.

I also assumed your net income will be 10% which is the bare bone break-even point for most companies. This means, in order to be paid, you have to be a part of your company expenses which can only be made up of 28.46% of every dollar. In short, you have $0.28 per dollar to spend on retail space, advertising, utility, internet, payroll (you included), insurance, and more.

Finally, we introduce the idea that if you sell a LOT of shoes at this rate, you'll eventually make money. This is true, but one important thing to keep in mind is -- what happens if a competitor finds a way to sell the same product with a higher margin. You are not going to have to fight your competitor on a margin war and those are outright painful to wage without an expert accountant or consultant on your side.

I hope all of this wasn't too technical for you. Let me know if you have any other questions.

Best Regards,
Tran Nguyen

[Please go to Settings->Edit Signature if you want to add your website link to the bottom of your posts]

[Davidl]

that makes a lot of sense thanks.

[Harold Mansfield]

You can't really answer that question based on hypothetical widget sales and no other information. It's a different answer for different companies. It's not one set equation that applies across the board, anywhere in the world, in every industry.

For a company like Exxon-Mobile, having $10k in profit at the end of the year is catastrophic.
For a one man show/Sole proprietor, $10k in profit after salary is probably pretty good.
For start ups like Facebook, Twitter and others...they were loosing millions for years before they just recently started making a profit.

In some industries you can make a 60% profit margin and still go broke and in others you can make a 10% margin and be wealthy.

Your question is kind of a contradiction of itself. One the one hand you are asking for some basics about operating expenses like any inexperienced start up would ask.
Then on the other you're factoring in employees and 401k's which either means you have investors who should already know the answer to those questions, or you're self financing and given the level of investment that it takes to offer salaries and 401k's from the start, you should know the answers because I'm assuming you didn't get that kind of start up cash without knowing.

[Davidl]

I'm trying to plan out a bit for the future when I start a small business. I don't completely understand what to expect in fees, taxes and the realistically how much it costs to run a start up or even all the basic requirements that a business needs to fulfil legally.Im unsure even if I hire someone full time if I need to set up a 401k or the canadian equivalent in a small start up.

I would prefer to learn this my self and then if it comes to the point where I can hire people I at least have the knowledge in my head and can better understand the business as a whole.

Is there a case study or article that describes the operations in depth like the basic start up FAQs, supply chain management (all the fees that come from importing, when to get a import/export license, custom brokers, cost of transporting by trucks domestic and to USA from Canada, warehouse or fulfillment centres), Marketing, accounting(budgeting,book keeping, tax collecting, cash flow analysis, insurance/pension), manufacturing, product development + testing, analyzing operations within the company.

[billbenson]

I'm trying to plan out a bit for the future when I start a small business. I don't completely understand what to expect in fees, taxes and the realistically how much it costs to run a start up or even all the basic requirements that a business needs to fulfil legally.Im unsure even if I hire someone full time if I need to set up a 401k or the canadian equivalent in a small start up.

I would prefer to learn this my self and then if it comes to the point where I can hire people I at least have the knowledge in my head and can better understand the business as a whole.

Is there a case study or article that describes the operations in depth like the basic start up FAQs, supply chain management (all the fees that come from importing, when to get a import/export license, custom brokers, cost of transporting by trucks domestic and to USA from Canada, warehouse or fulfillment centres), Marketing, accounting(budgeting,book keeping, tax collecting, cash flow analysis, insurance/pension), manufacturing, product development + testing, analyzing operations within the company.

That's a real mouthful. An MBA isn't going to know all of that and as said above, it is going to vary by industry. I think most people here either worked in their industry before starting their business or started small and grew. It's also been said that most small businesses fail and most self made millionaires have filed bankruptcy at least once.

A lot of what you said, you can learn by study. A lot you are going to have to learn by just doing it. At some point you have to just jump in and do it.

[Harold Mansfield]

David, you're asking a general question with 100k answers.
What kind of business are you trying to open? You may be reading case studies that list expenses that you don't need to worry about, or are leaving out a ton of things that you do.
Opening a Restaurant, is not the same as opening a Limo Service, or Web Design Firm from a home office, or a Group Home for the Mentally Disabled.

If you want specific answers, you need to tell us what kind of business we are talking about so that we can comment based on what we know about that specific business.
Otherwise all we're doing is guessing and you still aren't getting accurate information.

If you don't know what kind of business and you're just speaking generally, then the answer is you won't know what it takes financially until you know what kind of business you are opening.

[Fulcrum]

It appears to me that you're over thinking this. It's good to think but when you get lost in the details, things become confusing.

Rather than focus on everything else, first sit down and figure out how much you need to live off of and then figure out how much you have to start a business. This will let you know where you stand and should give you an idea where you can start.

Next, focus on businesses that you enjoy that will fit your current requirements and capabilities. This is where you will determine if what you decide will be able to support what you want.

I hope this helps.

[Davidl]

I intend to start a clothing line - handmade shoes and leather bags in Canada. Would like for this to become full time but would do part time in the early stages. For me personally it works better for me if I put the groundwork in first like for instance before I can sell my handmade leather goods I have to practice first, go to apprenticeship and learn the essentials to be able to manufacture at the level I want the product, to be same with my business knowledge I would want to practice and study at the same level I do my leatherwork.

I don't mind failing as long as I don't put so much capital in the company that I can't afford to open another one - at the end of the day if it the company goes bankrupt It wouldn't that much unless it was because of lack of knowledge that resulted in bankruptcy.

[Patrysha]

Are you in a large city or a rural community? I'm Canadian too and work for a non-profit that helps small businesses get started in rural Canada. There are similar organizations in the cities, but they're called different things in cities. Which is why I'm asking. There's help available that can answer the questions better for your particular needs than the forum can.

[Fulcrum]

I intend to start a clothing line - handmade shoes and leather bags in Canada. Would like for this to become full time but would do part time in the early stages. For me personally it works better for me if I put the groundwork in first like for instance before I can sell my handmade leather goods I have to practice first, go to apprenticeship and learn the essentials to be able to manufacture at the level I want the product, to be same with my business knowledge I would want to practice and study at the same level I do my leatherwork.

I don't mind failing as long as I don't put so much capital in the company that I can't afford to open another one - at the end of the day if it the company goes bankrupt It wouldn't that much unless it was because of lack of knowledge that resulted in bankruptcy.

Nothing wrong with setting things up with a solid foundation. In my opinion, you may be best suited to pick up some tanned hides/lamb skin and start making a few samples of your own design (seems like this would be well suited for a kitchen table start up). A small table at a farmer's market will allow you to start marketing and selling your product as well. This will let you get a feel for some basic costs, time required to manufacture and setup some initial processes (manufacturing, sourcing, marketing, etc). You will have to start somewhere, so might as well start as a bare bones operation with minimal financial risk.

As to an apprenticeship, I don't know if one exists in Canada for leather working.

[Davidl]

I currently have a few hundred dollars invested in some tools, leather and am working on learning more advanced techniques and am looking for apprenticeships in USA and Canada. Appreciate the response anyways.

I will also look into some local non profit patrysha.

Anyone know of a business website that provides helpful topics on start ups and business in general.

[Harold Mansfield]

I currently have a few hundred dollars invested in some tools, leather and am working on learning more advanced techniques and am looking for apprenticeships in USA and Canada. Appreciate the response anyways.

I will also look into some local non profit patrysha.

Anyone know of a business website that provides helpful topics on start ups and business in general.

In the US we have the SBA and thier website is full of information for start ups. I'm sure there is something similar in Canada.
But it sounds like you want something specific to your industry.

What you are doing now is the way to go. You have to learn the trade before you can apply it. As you go you will discover things about it that you can't possibly know right now that will help you further determine what it's going to take to do this as a business. That's why some of the questions you are asking can't be answered yet. You can't really pull fictitious numbers out of the sky for a hypothetical business idea for an industry that you don't yet know.

After you've learned a few things you may decide to do something non traditional to market and sell your products...which will make any hypothetical financials made today completely inaccurate.

One thing you know for sure is that you'll need more than a few hundred bucks if you plan to sell the products yourself. I wouldn't get all caught up in 401k's and stuff. You're a long way from that and the path you take to get there will dictate what you'll do and how you'll do it.

[Patrysha]

What part of Canada are you in? Each province has it's own small business services and then there are the ones that are federal.
Government of Alberta - Programs and Services - Starting a Business (http://www.programs.alberta.ca/Business/11693.aspx?N=772+11653)
Home - Canada Business Network (http://www.canadabusiness.ca/eng/)

[Davidl]

thanks harold for the help. Its hard to tell if I'm going down the right path or not.

Im in Ontario.