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ACTIVITY 1:
To determine the financial viability of the business idea.
[LO 4.4]
Up to now we have looked at the business idea in terms of the product, its manufacture and assessment, the market (the buyers) and the way in which we are going to get the buyers to buy the product (marketing strategy). However, now we must make sure that the idea is actually financially viable. A business is only viable if it shows a profit. That means that we should not sell our product or service at a loss and that the breakeven point (the number of items or service contracts that we have to sell in order to break even) is realistically attainable.
To be capable of doing that, we need to look at the following:
The selling price
The selling price is determined provisionally beforehand on the basis of market research. The research is used to determine which similar products or services exist and what they cost.
The cost of the product
A product cannot easily be created without any costs. For example, even if spring water is drawn and sold, the containers (bottles) still cost money.
Operating costs
Operating costs include anything that is needed to keep the business going, such as transport, salaries, marketing, postage, telephone costs, and so on.
Let us do a calculation to determine the viability of a specific business idea. Let us assume that we are going to sell hot dogs at an athletics meeting. It will be only a small meeting and we think we’ll be able to sell 100 hot dogs. After doing some research we decide that R6,00 is an acceptable price. The frankfurters cost R3,00 each and the rolls are R0,60 each. The various sauces that we’ll need cost R25,00. We find out that we’ll have to rent a stall at R50,00 and that we’ll need 20 posters at R8,00 each to market the stall.
This is what our calculation will look like:
Sales: 100 hot dogs @ R6,00 each = R600,00
Cost of products: 100 hot dogs @ R2,75 each, and sauce @ R25,00 = R300,00
Gross profit as first indicator (sales less cost of product) = R300,00
Operating costs: Stall @ R50,00 and 20 posters @ R8,00 each = R210,00
Operational profit = R 90,00
It seems, therefore, that the enterprise will be profitable. The selling price, as provisionally determined taking into account the market indicators, can thus remain unchanged. If the calculation did not show a profit, we could have considered adjusting the selling price upwards.
There are important tests that have to be done to ensure that the project is truly viable: we have to determine where the breakeven point is in case we are not able to reach the goal of selling 100 hot dogs.
ASSIGNMENT:
Determine the financial viability of your business idea by carrying out the above steps, using your data.
When you plan to start a business you must decide to whom the business will belong.
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