All of us conduct a cost-benefit analysis intuitively in our minds; think about the last time you wanted a doughnut but remembered your daily calorie counts. However, when it comes to building a business, the cost-benefit analysis seems to be missing for many, especially when I sit down and discuss their ideas with them.
The key tool to success for a business is in the numbers, in addition to experimenting swiftly into full-blown production with a strong foundation of careful and very strategic and specific financial study. I am about to combine my first business I started at 16 to a new one I am launching soon into 1 large platform, and for me as an entrepreneur, the numbers are my safe haven. This is where I saw a missing link for many when helping them with their ideas hence prompting me to write this article.
Money does not grow on trees, it is a sad but very important fact. A calculated decision is a decision made right where a multitude of risks are mitigated. The power is in the numbers simple as! The lack of understanding in identifying a problem in your revenue model where your overhead costs are too high is not an opportunity to hire a great 4.0 GPA accountant. It is in true form a recipe for failure; here is a knowledge gap unseen by many when building a business.
That being said the solution is easy: pay attention and start forming your business plan around your cost and benefit analysis, price analysis, and cash flow forecast and that should form the basis to how you would like to diversify your revenue model in relation to your product portfolio. Logically, a tactful entrepreneur needs to know how much he or she needs to pay in expenses to determine how much needs to be paid back in revenues with a profit on top. That is an equation only solvable through an in-depth financial analysis where every decision and product/ service is analyzed from its cost perspective and production plan. At that point, you can make your cost and profit structure your USP to compete effectively.
A wise mentor once told me ideas are cheap but can be very expensive to operate if not implemented right and can be highly profitable if implemented tactfully. Often when building a business, so much focus is geared towards an MVP or a prototype and the stock to be sold. Alternatively, minimal effort is geared towards financially breaking down and fully analyzing the idea from the get-go.
The Economist magazine puts it in a simple way: “decisions can never be made in isolation”. Whether you are launching an app or a new product into the market the power is in the numbers, analyze your direct costs per unit, your indirect costs, revenue per unit, establish a competitive sale price through a market price analysis and then include your profit margin right after you have full visibility over your total costs. This should then be fed into your financial statements and cash flow forecasts, and then a clear green light should appear which will make it easy for the entrepreneur to decide whether to launch a product or not. Even if these remain as forecasts, a risk calculated is a risk mitigated, and at times of austerity, numbers become more of an assurance when done right.