University of Rhode Island
TMD 402 Spring 2012 "Entrepreneurship"
Entrepreneurship is about taking calculated risks, not gambling on an idea with large sums of money. Professor Comerford of the URI College of Business, and former business financial consultant, is experienced in evaluating the feasibility of business ideas. Entrepreneurs’ belief in their idea are necessary for their success, however believing in an idea despite data that suggests the business is not viable leads to the high failure rate of start up businesses. Professor Comerford explained the steps required to adequately evaluate a business idea, and provided us with resources for planning a financially stable company.
Business plans and financial projections are very lengthy and detailed, but necessary for anyone who is considering starting a business. Websites such as score.org, and sba.gov, provide guidelines and templates to help entrepreneurs complete their plan with the information necessary to move forward with their idea. Planning and researching is the only way for the entrepreneur to determine if their business is likely to make a profit.
Professor Comerford explains that the break-even point is the most important part of the financial plan. It is often easy to find financing, but you won’t be able to pay your loan unless you understand the financial data for your business, and know when you will be able to pay your debts. People consider starting a business a high-risk endeavor because you “don’t know what will happen.” If you have planned, and done adequate research before you start the company, the only data you don’t know is how many sales you will have. The break-even point is the most important figure because it tells you what your sales must be.
The break-even point is calculated as the total fixed costs divided by the gross margin. The total fixed costs can be estimated by researching the operating expenses you will incur by running your business. Industry specific gross margin figures for actual businesses can be found in the RMA financial data. Professor Comerford stresses the importance of using data and break-even calculations to minimize the risk before you open. Economic census data, an additional resource, can be used as a guide to find industry and location specific sales data. However, you need to apply the data to your decisions in order for it to assist you. If the amount of average sales in your proposed location is lower than your break-even point, change your location, or you will be setting yourself up for failure.
Although you can’t predict exactly what will happen after you start your business, planning and estimating financial projections can help reduce the amount of financial surprises you encounter. Professor Comerford advises us to be conservative in estimating expenses, and to make the list as complete as possible. It is better to have to pay less than you expected, rather than more than you had planned to pay. One pitfall for some entrepreneurs is the misconception that after you reach your break-even point, you are collecting all the revenues as profit. The sales that occur after breaking even still require you to pay the cost of goods sold, and at the end of the year you are taxed on your profit.
Progressing from an entrepreneurial idea to starting the business is a science that requires extensive financial evaluation prior to the large investment of time and money. The extremely high failure rate of start up companies is a result of entrepreneurs who chose not to do the necessary research before starting up. Professor Comerford has worked with many entrepreneurs who fail as a result of starting businesses based on their hobbies, without giving concern to the feasibility of the data for their business plan. Fortunately for aspiring entrepreneurs, there is a plethora of resources and data that can largely minimize the risk involved in starting a business.
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