Ava Mensah wants to open Ava's Cycle Works, a student-run shop that tunes up bikes and sells refurbished used bikes from a rented garage for one season, May to October. Before she spends a dollar she needs answers to two questions. First: how will she know whether the business is doing well? Saying "I hope it makes money" is a wish, not a goal. Second: how much money does she need on opening day? If she only counts the tools and the first stock of bikes, she will run out of cash in the first slow week. This lesson answers both questions, and every number in it belongs to Ava's Cycle Works, so you can follow one venture all the way through the financial plan.
Four financial goals every venture sets
- Break-even point: the level of sales at which total revenue exactly covers total costs, so profit is zero. A break-even goal says how soon, or at what volume, the venture should stop losing money. Example: reach break-even of 38 tune-ups in each summer month.
- Projected profit: the net profit (revenue minus all expenses) the venture expects to earn over a period. Example: earn a net profit of $3,105 in the first season.
- Return on investment (ROI): net profit as a percentage of the money invested. It tells an owner or lender whether the money is working hard enough to be worth the risk. Example: earn an ROI of at least 30% on the $8,700 invested.
- Market share: the venture's sales as a percentage of all sales in its market. Example: complete 15% of the bike tune-ups done in town this season.
- Make a lot of money this summer.
- Be the most popular bike shop.
- Get our money back quickly.
- Sell lots of bikes.
- Earn a net profit of $3,105 between May 1 and October 31.
- Complete 195 tune-ups this season, 15% of the roughly 1,300 done in town.
- Earn an ROI of at least 30% on the $8,700 of start-up capital in the first season.
- Sell 26 refurbished bikes at $250 each by October 31.
Calculating start-up capital
Start-up capital is the total amount of money a venture needs before it opens. It has two parts. One-time start-up costs are paid once, before the doors open: equipment, the first stock of inventory, deposits, registration, a website and signs. The operating reserve is cash set aside to pay the regular monthly expenses (rent, phone, advertising, utilities) for the first few months, because sales usually start slowly and a new venture has no history to borrow against. A common rule is to reserve three months of operating expenses. Ava's Cycle Works' monthly operating expenses are rent $600, phone and internet $60, advertising $150 and utilities $90, for $900 a month.
| Item | Amount |
|---|---|
| Tools and two repair stands | $2,400 |
| First stock of used bikes and parts | $1,800 |
| Garage rent deposit | $600 |
| Business name registration and permits | $100 |
| Website, logo and signage | $500 |
| First year's insurance | $600 |
| Total one-time start-up costs | $6,000 |
| Operating reserve (3 months x $900) | $2,700 |
| Total start-up capital | $8,700 |
Projected profit and return on investment
To set a profit goal, Ava builds a projected income statement for the season from her research: 195 tune-ups at $60 and 26 refurbished bikes at $250. Each tune-up uses $15 of parts and each bike costs $100 to buy and fix up. She also counts the wear on her tools ($2,400 spread over five years is $480 a year) and six months of interest on her youth loan ($90), because both are real costs of the season even though no cash leaves for the wear.
| Projected income, first season | Amount | Total |
|---|---|---|
| Tune-up revenue (195 x $60) | $11,700 | |
| Refurbished bike revenue (26 x $250) | $6,500 | |
| Total revenue | $18,200 | |
| Tune-up parts (195 x $15) | $2,925 | |
| Cost of bikes sold (26 x $100) | $2,600 | |
| Total variable costs | $5,525 | |
| Gross profit | $12,675 | |
| Rent, phone, advertising, utilities (6 x $900) | $5,400 | |
| Helper wages (3 x $800) | $2,400 | |
| Insurance | $600 | |
| Registration, website and signage | $600 | |
| Tool wear (amortization) | $480 | |
| Loan interest | $90 | |
| Total operating expenses | $9,570 | |
| Net profit | $3,105 |
For Ava's Cycle Works, In plain words, every dollar put into the venture is projected to earn about 36 cents of profit in the first season. Ava can compare that with what the money would earn in a savings account, which pays far less but carries almost no risk. Always say what "investment" means: here it is the full $8,700 of start-up capital. Measured only on Ava's own $2,700 of savings, the ROI would look much larger, which is why the base must be stated.