Financial Implications of Starting a Business

Current Situation

In the following I assume I start from a situation of working for 40 hours for a boss to earn a monthly wage. I would like to start a business giving workshops to groups of people. All numbers and estimates are for demonstration purposes only.

Starting with my current situation:

• income (total € 3000 per month)
  • wage (€ 3000 per month)
  • bonusses and overtime (€ 0 per month)
• effort (total 45 hours per week)
  • time spent at work (40 hours)
  • time spent commuting and preparing (5 hours)
• expenses (total € 2700 per month)
  • private expenses (€ 2700 per month)
• buffer (total € 20000)
  • private assets (€ 20000)

Situation After Business Starts

When my business is running smoothly, I aim to give one workshop a week to a group of people. My business covers all its expenses. The profit from the business is sufficient to pay for my personal expenses. My buffer is growing. There is no need to maintain a (part-time) job.

But until that time, before my business is profitable, my situation could look like this:

• income (total € 2000 per month)
  • wage (€ 1500 per month)
  • sales (€ 500 per month)
• effort (total 40 hours per week)
  • time spent at part time job (20 hours per week)
  • time spent commuting and preparing (3 hours per week)
  • billable business hours (0 hours per week)
  • non-billable business hours (max 17 hours per week)
• expenses (total € 4000 per month)
  • business expenses (€ 1300 per month)
  • private expenses (€ 2700 per month)
• buffer (total € 20000)
  • private assets (€ 15000)
  • business assets (€ 5000, initially from private assets)

Note that long term I can sustain putting in 40 hours per week of total effort. I can allow for occasional bursts of 60 hours per week. If I do this regularly and for a number of weeks at a time it will surely lead to exhaustion and burnout.

I can estimate how much money I need to make to reach break-even. This is when all expenses and all income is balanced. So I add all my personal expenses and my (estimated) business expenses. I can subtract any part-time wage. This is how much turnover (sales) the business needs to generate at a bare minimum. With the situation as above I will need at least € 2500 in turnover per month (€ 4000 total expenses minus € 1500 part-time wage), or € 30000 per year.

I can calculate my burn. This tells me how many months I have left before I run out of money (buffer). For this, I take my current buffer and divide by all my expenses per month. Note: if I still have some monthly secondary income (wage, benefits) I can reduce my total expenses by this amount before dividing the current buffer.

With the situation as above, my burn is eight months. This is € 20000 total buffer divided by: € 4000 in expenses minus € 1500 part-time wage. In other words: within eight months I need to increase my sales by € 2000 per month (total expenses minus part-time wage minus current sales) to stay afloat.

If I want to quit my job completely the business needs to provide for all expenses: € 4000 per month or € 48000 per year. I can now estimate how much money I need to make from each workshop I give.

Out of the 52 weeks in a year, I estimate I am able to organize 40 workshops. The other 12 weeks are for vacation, preparation, etc. I divide the turnover per year by the number of workshops in a year. So € 48000 divided by 40 gives € 1200 per workshop.

If each workshop is attended by 10 people, I need to ask at least € 120 per person. With 20 people the minimum fee drops to € 60.

Effect of Expense Reduction

In the previous example I have kept personal expenses at the same level as the starting situation. If I aim to reduce my personal expenses by 25% in this fictional example and keep business expenses under control, this is what happens.

• income (total € 2000 per month)
  • wage (€ 1500 per month)
  • sales (€ 500 per month)
• effort (total 40 hours per week)
  • time spent at part time job (20 hours per week)
  • time spent commuting and preparing (3 hours per week)
  • billable business hours (0 hours per week)
  • non-billable business hours (max 17 hours per week)
• expenses (total € 3000 per month)
  • business expenses (€ 1000 per month)
  • private expenses (€ 2000 per month)
• buffer (total € 20000)
  • private assets (€ 15000)
  • business assets (€ 5000, initially from private assets)

For break-even in this case I will need at least € 1500 in turnover per month (€ 3000 total expenses minus € 1500 part-time wage), or € 18000 per year.

Here my burn is 1 year and 1 month. This is € 20000 total buffer divided by: € 3000 in expenses minus € 1500 part-time wage. By reducing expenses I increased my runway by five months.

If I want to quit my job completely the business needs to provide for € 3000 per month or € 36000 per year. So I need to earn at least € 900 per workshop. I need to ask for € 90 per participant with ten participants per workshop or € 45 if 20 people attend on average.

Questions Arising

These figures can help me ask some difficult questions:

• is this a viable business?
• can I grow the business sufficiently in the available burn time?
• is my target audience willing to pay these fees?
• is my target audience size currently too small?