Beyond tracking transactions, it’s critical to understand the economics of your business — the costs, profit margins, break-even point, and how money flows through your business. Knowing this helps you make smarter decisions, plan for growth, and determine how much you can safely take out of the business.

💻 Presentation: Making Sense of the Numbers in Your Business

1. Identify All Key Costs

Start by listing all the costs involved in running your business. Examples include:

• Rent, insurance, utilities, security system

• Salaries, hourly labor, fringe benefits

• Direct materials, merchandise, packaging, shipping

• Marketing, sales commissions, professional fees

• Travel, leased items, uniforms, office supplies

• Depreciation, interest expense

The goal is to get a clear picture of everything you spend money on each month.

2. Link Costs to What You Sell

Determine the “unit of analysis” — the activity that generates revenue in your business. Examples:

• Lawns cut (landscaping)

• Haircuts (barber shop)

• Cars washed (carwash)

• Dresses sold (retail)

• Billable hours (service business)

• Events catered (catering)

This helps you understand which costs are tied directly to producing a unit of your product or service.

3. Classify Costs as Fixed or Variable

• Variable costs change in direct proportion to what you sell. Examples: hourly labor, direct materials, sales commissions, shipping, and packaging. If you sell more units, these costs go up; if you sell less, they go down.

• Fixed costs stay mostly the same regardless of sales. Examples: rent, insurance, salaries, depreciation, marketing (unless you deliberately change the amount), and office supplies. Fixed costs only change if your business expands beyond its current capacity.

✅ List: Costs Examples Classified by Variable VS Fixed

▶️ Video: Variable vs Fixed Expenses

✅ List: Variable vs Fixed Expenses (Worksheet)

📝 Template: Business Expense Tracker by Type and Recurrence

📝 Template: Business Expense Log

Understanding Your Revenue Drivers:

Every business must generate revenue, and it’s important to understand where your sales are coming from. These are called revenue drivers — the main sources of income in your business.

For example:

• A bowling alley might have three revenue drivers: games, shoe rentals, and the snack bar.

• A surfboard shop might have four: longboards, shortboards, boogie boards, and board wax.

• A restaurant might group its many menu items into five revenue drivers: appetizers, entrees, non-alcoholic beverages, other beverages, and desserts.

• A convenience store could organize hundreds of items into eleven revenue drivers: packaged drinks, groceries, ready-to-eat foods, toiletries, candy, fountain drinks and coffee, alcoholic beverages, tobacco/vapes, lottery tickets, automotive items, and over-the-counter medications.

Some businesses may have just one revenue driver, and that’s perfectly fine. The key is to group your sales into categories that make sense for your business. This helps you track which areas are performing well, which are most profitable, and where you might want to focus your efforts to grow your business.

To figure out your breakeven point, you need to know the price and profit margin for each of your revenue drivers.

• If you sell only one product or service, this is simple: just use that price and margin.

• If you have multiple products or services in a revenue driver, you can either:

  • Use the average price of the items, or

  • Use the price of the item that sells the most as a representative.

This helps you understand how much you need to sell to cover costs and start making a profit.

🧠 Exercise: How to Calculate Your Contribution Margins and Your Breakeven?

▶️ Video: Managing Breakeven

🧠 Exercise: Breakeven Paint Ball Battleground

🧠 Solution: Breakeven Paint Ball Battleground

🛠️ Tool: Breakeven Analysis (Editable)

Understanding How Your Business Makes Money

Every entrepreneur knows that profit matters, but not everyone fully understands how their business actually makes money. Many have a general sense of it, but no clear model. This section introduces a simple tool you can use—with or without a consultant—to understand and improve your profit model.

Your profit model (or economic model) has four key parts:

1. Margins

2. Volumes

3. Operating leverage (your cost structure)

4. Revenue drivers

These four pieces determine how your business earns—and keeps—money.

Learn more about your profit model in the reading: Understanding How Your Business Makes Money

🧠 Exercise: Playing With Ziyanda’s Profit Model

🔍 Guide: Financial Model Guide

Keeping your numbers organized is key to understanding how your business is doing and making smart decisions. Below are a few practical templates designed to help you stay on top of your finances — from tracking sales to setting the right prices. You’ll find tools like a Start-Up Cost Calculator, Know All Your Numbers worksheet (for costs, revenue drivers, margins, and projections), a Sales Tracker with Profit Calculator, a Chart of Accounts, and a Pricing Calculator to help you find the optimal price for your products or services.

Template: Startup Cost Calculator

📝 Template: Know All Your Numbers

📝 Template: Sales Tracker (With Profits)

📝 Templates: Chart of Accounts

📝 Template: Pricing Strategy Calculator

📝 Template: Invoice, Services

📝Template: Invoice, Physical Products

📖 Reading: What is Debt?

📖 Reading: Credit Scores

Understanding the Types of Costs

Start-up costs are one-time expenses that you need to spend to launch the business. You will pay to register your business, and may pay to apply for a patent or trademark or copy right, obtain a license, create a website, consult with a lawyer or some other professional, and put a deposit down on a retail location, or with a utility company. Please note that in STEP 17 we will further explore how much money you need to start up your business.

Operating costs are usually recurring costs involved in daily operations. They are costs related to acquiring inventory, producing your product or service, doing your marketing, paying employees, travel to conferences, trade shows or fairs, and running an office. Operating costs can be further broken down into fixed costs and variable costs. As this is a critical distinction, let us consider each of these in more detail.

a) Variable costs: these are expenses that are directly associated with production and sales. These costs increase and decrease in accordance with the production level and sales level of a product or service. Some examples of variable costs are materials, shipping cost, and labor. Using candles as an example, the more candles you sell, the more candles you will need to make. This means you will need to buy more materials, hire more employees, and ship more candles, causing your variable cost to increase in direct proportion. If it costs $9 to make one candle, and you need to make 300 candles to meet monthly demand, then your total variable cost will be $9 times 300 = $2,700.

d) Fixed Costs: these are expenses that do not fluctuate in accordance with production and sales levels but rather remain the same or relatively constant in a given year. These costs are often established by a contract or agreement so that they do not vary over time (an example would be a rental agreement, or a contract when you buy a business insurance policy). Some examples of fixed costs frequently encountered by our entrepreneurs are rent, utilities, marketing, employee uniforms, and insurance. Unlike variable costs, fixed costs remain independent of specific business activities and do not fluctuate based on sales and production. For example, if you sell more scooters in October than you did in September, the cost of renting the facility in which you make the scooters does not change. If you pay workers an hourly rate, that is generally treated as a variable cost (you need more labor the more you produce of the more jobs you do). However, if you pay anybody a salary (e.g., you hire a manager and pay them $30,000 a year), then this is considered a fixed cost. You are paying them $30,000 no matter how much is actually produced and sold. Utilities is a bit tricky, as you likely will spend more on utilities if you produce and sell more, but you also need a certain amount of electricity or water no matter whether you have a lot of sales or business is slow. You have to keep the lights as well as the heat or air conditioning on. So, to simplify things, for most businesses we treat utilities as a fixed cost, even if it has elements that are both fixed and variable.

What about Buying Equipment?

In this example, we have left out a big cost category and it is a fixed cost. For many businesses, you need to buy equipment to run the business. A venture that makes chocolate may need a mixer that costs $18,000, a cleaning business may need an industrial vacuum cleaner, a landscaping company may need a high performance riding lawn mower, and a screen printing business may need to high volume printing machine that costs $14,500. If we assume we need these items to get the business up and running, the entrepreneur might want to treat them as start-up costs. However, as they directly affect the daily operations of the business, and the ability to continuing produce, we treat these costs as operating costs and write off a certain amount of this cost as part of fixed expenses each year. This process is called depreciation. For example, if you buy a truck for the business, and it costs you $30,000, then it is generally assumed that the truck has a useful life. The tax authority (the IRS in the United States) will recognize standard useful lives for different categories of equipment. If the entrepreneur paid $30,000 for the truck, and it is estimated to be useable for five years before it must be replaced (even if it actually can be used for much longer), then this indicates that the truck is wearing out at the rate of $6,000 (or $30,000/5) per year. The entrepreneur can claim this $6,000 as a legitimate business expense, and it is treated as a fixed expense.

The decision regarding what prices to charge for your products or services should be approached both carefully and creatively. The price you charge not only determines how much profit you make on each item you sell, but it is an important strategic decision. It conveys an image to customers regarding your quality. It reflects how you are trying to position the firm in the minds of those customers. It reflects your brand identity. And most critically, it is a reflection of how much value you are creating for your buyers.

This last point is of special note. Price is a number. So, you are trying to put a number of the amount of value a customer is receiving. When a customer pays $5.50 for a cup of coffee at Starbucks, and $1.00 for what appears to be the same product at McDonald’s, they are indicating that they see that much value in each case. And, in their minds, it is not the exact same product. They perceive more value in the case of Starbucks, and they are willing to pay for it.

We find that one of biggest mistakes made by entrepreneurs in the UPBI program is that they price too low. They might be afraid that if they did not charge a low price, they would not get any sales. Or, they might think that the low price is a source of competitive advantage. Alternatively, they might think that the low price is all the product or service is worth. Advantage does not come from low pricing, because sooner or later someone will charge a lower price than you. Further, if the price is too low, then you are not making enough money to reinvest in your product quality, product features, packaging, customer service, and other factors that create more value for customers and keep you competitive. Advantage comes from being different from your competitors in ways that matter to customers.

Too many entrepreneurs focus exclusively on their costs when setting prices. They try to estimate their cost per product or service sold, add what they think is a reasonable mark-up, and that is the price they charge (and they often leave out the cost of their own labor). This is a flawed approach for many reasons. But the key one is that this approach frequently fails to capture the value you are creating, and what the customer might actually be willing to pay. So, with low prices you are leaving money on the table. Below we will consider a more strategic approach—one that might make you more money.

A Basic Law of Pricing

When you are considering what price to charge, keep one core principle in mind. It is always easier to lower price than it is to raise price. As a result, you should always err on the side of a higher than a lower price. If you are charging $17 for your product, but sales are very slow, and so you decide to lower price to $13, it is very difficult to subsequently raise price back up when demand conditions are better and you are selling more. If $17 is an appropriate price (it reflects the value that customers perceive and are generally willing to pay for), then when sales are slow it might be better to maintain the list price, but offer discounts, specials, coupons, rebates, or some other creative way of temporarily lowering price. When the discount or special expires, you still have your price at $17.

Start With Your Target Audience

Pricing decisions begin with a clear sense of the type of customer you are targeting (refer to STEP 19). You cannot make every customer happy, so determine your target audience and cater the price of your product or service to that audience.

Different market segments tend to perceive different amounts of value from the same product. Some are more price sensitive and others are less so. A young person might not perceive the same value in a health insurance policy as would an older person. A business traveler might be willing to pay more for an airplane flight than would a leisure traveler. Someone with more income might be less price sensitive when buying a meal than a person with a lower income.

A Four-by-Four Approach to Pricing

There are four determinants of price and four decisions that must be made about your prices. Hence, we are suggesting a four-by-four approach. The four determinants are costs, competition, customer value, and your overall marketing strategy:

a. Costs – Costs do matter, and you need to cover them. So, trying to estimate what your cost per unit will be is a starting point in pricing. It does not tell you what price to charge, but instead, what the minimum price must be to ensure you are covering costs. A mistake many entrepreneurs make in the early days of their business is that, when estimating their costs, they do not factor in their own labor time. The entrepreneur is usually doing much of the work in making a product or providing a service, especially in the early days of the business. So, factor in how much of your time goes into making a candle or cleaning a house. Even if the hourly rate is lower than what your time is actually worth, factor in some hourly rate.

b. Competition – Take some time to see what competitors are charging for a similar product or service. Consider a higher end, middle range, and lower end competitor so you can see the range in prices being charged and the differences in the quality being provided. You may be offering more value or targeting a different market segment, but competitor prices are an important reference point.

c. Customer value and demand – The most important consideration is customer value perceptions when it comes to your type of product or service. Again, there are multiple market segments and they tend to perceive value differently. So, focus on the value perceptions of the types of customers you are targeting. Value perceptions are driven by a range of factors, including the strength of customer needs, their income, their knowledge of competitors and what they charge, and their previous buying experience. Also look at demand patterns. In general, is demand up or down? Are there peak demand seasons or times of the year? Are there factors in the external environments that are driving people to need more of your type of product or service?

d. Your overall marketing strategy – What is the image you want to project in the marketplace? How are you trying to position your business in the minds of customers? How are you differentiating the business from competitors? These are all elements of your overall marketing strategy. Price is a tool to reflect that strategy. If you are trying to position yourself as the premium quality provider, then go higher. If you are not all that different from your competitors, then charge a price closer to what they charge. If you want to be perceived as the best value for the money, then a lower price is going to be more appropriate.

With these four determinants in mind, you now must make four decisions: your price objectives, price strategy, price structure, and price levels/tactics.

Price objectives are concerned with what you are using the price of your product to accomplish. This could include the amount of profit you need to make per unit sold, the image you are trying to project, or the extent to which you are trying to discourage competitors from entering the market. Keep in mind when setting price objectives, the relationship between volumes and margins (see STEP 16). If you are selling a product or service where volumes are lower (because the market is smaller, or you are customizing the product to the customer’s specifications, or it takes longer to serve one customer (such as with an event planner), then you need higher margins in order to make money, and so you may need to charge a higher price. Similarly, if you are likely to sell a high volume of items in a given week or month, then lower margins are okay, which can mean a lower price. Another example of a price objective comes into play when you are selling multiple products or services. You might be using the price of one product to encourage sales of another product in your product mix.

Price strategy is a decision on where you want to be on the following scale:

Penetration pricing →Parity pricing→Premium pricing

Keep in mind that price is perceived in customer’s minds. Penetration pricing involves charging an amount that is perceived to be low relative to what people expect to pay or the prices they are used to seeing for this type or product or service. Parity pricing is charging a price at or near what customers generally expect to pay or perceive is the normal price. Premium pricing involves an amount that people perceive to be high relative to their normal expectations of what the product or service should go for. So, the question become “where on this continuum do you want to be?”. For instance, are you trying to be just above parity, or a little below premium?

Price structure concerns how you might vary your prices by: a) aspect of the product or service; b) type of customer; or c) time and form of payment. This is where the real creativity comes into play when setting prices. Hence, a rental car company charges a base price to rent a compact car, but might also have fees that vary if you rent on a weekend or weekday, or if you are returning the car to the same place you picked it up. A good example of pricing by aspect of the product is “bundling” and “unbundling”. Bundling is where you combine two or more of your products or services and charge a lower price than what the customer would pay for each product or service individually. Insurance companies will charge you a lower combined price if you buy both their auto insurance together with their home insurance. Unbundling is when you charge for individual parts of the whole, such as a restaurant that charges a la carte for a drink, a salad, an entrée, a vegetable, a potato, a roll, and dessert. A gym might have an overall membership fee to use the entire gym facility, and a cheaper membership fee just to use the pool.

Prices can also be varied by type of customer. So, the car company above might have lower prices for government employees, or for senior citizens. An auto repair business might have lower prices for frequent customers, or veterans. An airline will try to find creative ways to charge business travelers more than people traveling for personal or pleasure reasons. Here, you are looking for market segments that differ in how price sensitive they are. Think about a bar that has a ladies night, charging women a lower price than men.

Prices can further be varied based on when the customer pays, how they pay, and how they buy. So, customers who pay early versus at the time of receiving the product or service versus late may be charged different amounts. Customers who pay cash versus credit could be charged differently. Customers who want to pay over time, such as with a layaway might be charged a different price. The price could also vary depending upon whether the customer buys larger or smaller quantities, or whether they buy online versus through a store.

Price levels and tactics is the final and most important decision area. It is driven by the decisions made in the first three areas. Price levels refers to the actual amount you are going to charge each item. An example would be the decision to charge $8.95 per unit. Please note that many prices end in an odd number, in this case .95, rather than .00. While it is not clear that this generates more sales, it is done on the assumption that customers associate $8.95 more with $8.00 than with $9.00. In addition to setting the price level, you may want to include tactics that are called price promotions. Examples of these pricing tactics could include buy one, get one free; or a coupon that gets you 10 percent off; or a deal where every fifth time you come in and buy, you get thirty percent off; or a rebate for $10 offered during the month of June.

Finally, you should also regularly review your prices. Your costs will change over time, and if they are going up, you may or may not be able to pass the increase on to customers in the form of higher prices. It is also important to keep on top of what competitors are doing with their prices not just in your local market, but look online to see what businesses like yours are doing in other parts of the country.

Total profit equals sales revenue minus expenses. However, it is also important to know how much profit you make on each item you sell, which we will call your profit margins. In the example of a copier business in STEP 12, the company makes a much higher profit margin on each service contract it sells than on each copier it sells.

To determine the margin on each of your products, take the price per unit (P) and subtract the variable cost per unit (VC), or the cost to make (or acquire), package, sell and deliver one unit of the product or service. So, let’s assume you run a women’s clothing boutique. If a dress costs you $13 to make (or to purchase it from whoever made it) and you sell the dress for $40, your margin is $40 - $13 = $27. We will call this the contribution margin (CM), as it is indicating what is left over after covering variable costs to contribute to your fixed costs. This means you have $27 left over to contribute to covering your rent, insurance, marketing and other fixed costs. To summarize, then, to calculate your contribution margin, use the following equation:

P (Unit price) – V (Variable Cost) = CM (Contribution Margin)

Now, let’s consider another example. Assume the entrepreneur is starting a car wash business. We will assume that the price of a car wash is $17. Our variable costs include hourly labor, water, soap, and wax, and the variable cost per car wash is $6. So, our contribution margin is $17 - $6 = $11. In this example, let us next consider the fixed costs of running the car wash. Assume the entrepreneur is paying rent for the car wash facility, insurance, marketing costs, a salary to a manager, depreciation on some equipment, and other fixed costs that come to a total of $4,500 a month, or $54,000 for the year.

With this information, we can now calculate the breakeven point for the business. Breakeven is the point where you are selling enough to cover all of your costs, both variable and fixed. You are not making any profit. Here is the basic formula for calculating the level of sales you must achieve to breakeven:

Breakeven units = Total Fixed Costs/Contribution Margin

In our example of the car wash, this would be $54,000 / $11 = 4,909. This means we need to wash 4,909 cars to breakeven during the year. This would mean we have to wash 409 cars per month, or (assuming we are open 6 days of the week or 24 days per month) 17 cars per day.

A more complicated variation would be a situation where you are selling multiple products and each one has a different contribution margin. An illustration is provided below where the entrepreneur has four revenue drivers. Basically, you need to:

a. Calculate the contribution margin for each revenue driver or product category. If a revenue driver has multiple products that have different contribution margins, use the average contribution margin across products, or the contribution for the product that you sell the most of.

b. Make an estimate of the percentage of your total sales that you expect to come from each of your revenue drivers or product categories.

c. Take the contribution margin for the category times the percent of sales that you expect to come from the category. This produces a weighted average contribution margin (WACM) for each revenue driver.

d. Add together the weighted average contribution margins for the revenue drivers to produce a total number.

e. Divide this total number into your fixed costs, so your formula becomes:

Breakeven = Total Fixed Costs/Weighted Average Contribution Margin

f. This will tell you breakeven units, which can then be broken down into breakeven units for each revenue driver.

It is critical that you understand the relationship between volumes and margins in your business. Volume sold times the margin you make on each product or service sold equals profit. Let’s explore this relationship, starting with margins.

Margins were explained in STEP 15. Your margin on a product or service is the price your customer pays minus the direct cost of producing that product or service. For example, it is $3 for a business to produce a single sandwich. The customer pays $8 for the sandwich. The price of the sandwich ($8) minus the cost of producing the sandwich ($3) is $5.

Margins can also be expressed as a percentage. Here, we are taking the price minus the unit cost of an item, and then dividing this difference by the price. In our example above, the margin on the sandwich is:

Margin on the sandwich: (8-3)/8= .62 or 62%

Now, to understand the full picture, we have to also consider volume. Volume concerns the activity level within a business. This is the number of units that a business is selling, such as a business sells 20 sandwiches a day, or cleans 3 houses a day. If I have relatively low margins, then I need higher volumes to make money (total profit). If I have relatively high margins, then I don’t need to sell as many units to make money.

Let’s consider margins and volumes in two very different businesses. First, think about grocery stores, which generally make low margins on their products, often as low as 2 percent on average. But their volumes are quite high all year around. This is because a) people generally buy a lot of items when they visit a grocery store, b) lots of people go to the grocery each day. So, the grocery can make good money if volumes remain consistently high in spite of the fact that they don’t make much money on each item they sell.

Alternatively, let’s look at a jewelry store that sells diamond rings. In this case, the entrepreneur might be earning a 300 percent margin on a typical ring being sold. This is because the ring was marked up a lot over what it cost the entrepreneur. However, they do not sell many diamond rings in a given week, and so volumes are quite low. On balance, the store owner is making money based on having low volumes of sales, but high margins on each item sold.

So, here are four situations and their outcomes:

• Consistently high volumes and high margins: the entrepreneur is making a killing!!!!

• Consistently high volumes and low margins: the entrepreneur is doing fairly well!

• Consistently low volumes and high margins: the entrepreneur is doing fairly well!

• Consistently low volumes and low margins: the entrepreneur is in real trouble!!!!

Many entrepreneurs in our program get into trouble early on in their businesses because they are making low margins and selling low volumes. This happens for a number of reasons, but the two primary causes are pricing too low and having limited production capacity. They price too low because they mistakenly believe they have to be low to be competitive.

Their production capacity is limited because i) the production of the product or service is labor intensive and the entrepreneur is doing all the labor themselves; or, ii) they cannot afford production equipment or technology that would allow them to produce at higher levels; or, iii) they don’t have the money to buy lots of inventory, or, iv) they are working from home or in a small space where they cannot produce high volumes, or v) they are selling something that takes a lot of time to produce and deliver one unit. Think about an event planner who is only able to manage three events in a week, but is also pricing very low. Another example is an entrepreneur who makes nicely designed baby bibs by hand, and works from home. She does all the work herself and can only make five baby bibs in a day. If she produces baby bibs five days a week (and this leaves little time for marketing, bookkeeping and other business demands), then she can produce about 100 bibs a month. Let’s further assume she sells her bibs for $12 a unit, and that it costs her $9 a unit to produce (including her labor time, which we value at $15 an hour). So, her margin on each bib is only $3. In this example, her profit if she sells everything she produces is only $300 a month.

To avoid the low margin and low volume trap, there are two important things to remember:

1. Don’t price too low; the lower you set your prices the more you will have to sell. This means the more you will have to produce.

2. Find ways to increase your margins. This can be difficult, especially when producing your product or service is labor intensive or requires expensive equipment. For services, increasing margins usually means hiring more employees, or making your current employees work longer and harder hours. For products, increasing margins may also mean hiring more employees or making your current employees work longer, harder hours, but it also may mean acquiring more materials, or buying equipment and machinery. You might also look ahead to STEP 20 where we’ll discuss leveraging resources. This will be helpful when finding ways to increase your margins.
You should always be looking for creative ways to increase your margins. Find ways to increase the value of your product or service, or to better differentiate what you are selling (see STEP 23). Find customer segments who are less price sensitive and so you can charge more. Find ways to maximize your customer spending. Getting customers in the door is half the battle. If they are already buying one item, it should be easy to get them to buy another item. Here’s a useful resource on possible ways to increase margins: https://www.vendhq.com/blog/increase-profit-margins/

Cash flow is the difference between the amount of money coming into the business each month and the amount of money going out of the business to pay for things. A positive cash flow is the point where more money is coming in than you are spending each month. While most of our entrepreneurs are able to keep their initial costs relatively low, keep in mind that starting a business costs money and it is important not to underestimate that amount.

When you first start a business, you are usually spending more money than money coming in. So you operate at a loss or deficit until you attract enough customers and make enough sales to cover all your costs. This means you need to have enough savings or cash on hand to get you to the point that the business is self-sustaining or is generating excess cash (which can be reinvested in the business or taken out to support you and your family). And even after you get to this point, you will always want to have some sort of safety margin in terms of excess cash on hand for unexpected developments.

You should be thinking about three categories of costs:

1. One-time start-up costs: expenses that you usually pay one time in order to get the business launched, such as registering the business, paying for licenses or permits, legal costs, equipment/machines you need to buy prior to starting operations, money spent on research, technology development, copyrights, patents, trademarks, creating a website, developing a logo, buying office furniture, having a grand opening. Think of any costs you spend to get to the point that you can make your first sale.

2. Monthly operating costs necessary to operate the business on an ongoing basis (sometimes called overhead): this would include ongoing monthly costs for rent if you have an office or store or facility, business insurance, utilities, employees who receive a salary rather than hourly pay, marketing, office supplies, security systems, and fees for professional services.

3. Monthly operating costs necessary to make and sell your product: this would be the ongoing monthly costs to pay for hourly employees, raw materials, ingredients, inventory, packaging, and delivery costs. These will vary directly with how many sales you make, and so are driven by your forecast of monthly sales.

The beginning point is to make a list of all the one-time start-up costs. We have listed some of the most common ones in bullet point #1 above. Next, estimate your overhead costs, or other ongoing costs of keeping the business going each month, such as rent and insurance (we also refer to many of these as fixed costs). Beyond this, you need to consider a) your costs and margins related to making and selling the product or service; and b) your projected level of sales in each of the first twelve months of your business.

To determine how much money it will require to start your business, it may be helpful to create a chart like the following. Here, we are considering the first twelve months of the business (see table attached here).

In this example, you would need the $9,820 to cover your start-up costs, but you also have to have enough money to cover your losses in the first months of operations. In month 1 of operations, you are selling 40 units. You are making $12 in margin on each unit sold (after covering your variable cost, or cost of making and selling the product or service). But your overhead or fixed costs in month 1 are $2,020. With 40 units sold, you would only have $480 left over to cover the overhead. So, you are short by $1,540. In month 2, you anticipate selling 85 units, and continuing to earn $12 in margin on each item sold, for a total of $1020, but overhead continues to be $2,020, and so in the second month you are short by $1,000. In month three, estimated sales are 130, the margin continues to $12 per unit, and so your total revenue coming in is $1,560. This leaves you cash short on covering costs by $460. In month four, you expect to sell 170 units, with a margin per unit of $12, for a total cash inflow of $2040, and overhead is $2,020, which means more cash is coming in than is going out.

So, you would have needed $9,820 + $1,540 + $1,000 + $460 = $12,820 to start the business and have enough money on hand to get to a positive cash flow. This number assumes you achieve the level of sales you expect to have each month and that no unexpected expenses occur. So having a safety margin would probably be a good idea.

Here is a good source when you are thinking about what your startup costs might be: https://www.nerdwallet.com/article/small-business/business-startup-costs

It is vital that you separate your personal expenses from your business expenses. We strongly encourage you to be disciplined in not trying to combine the two. Having a business bank account that is separate from your personal bank account is critical, but so too is carefully distinguishing which expenses are personal and business-related, and keeping precise records. At the same time, many of our entrepreneurs depend on the business to help cover their family living expenses.

Your goal should be to put as much money back into the business each month as you can, particularly in the early months. However, the practical reality is that sometimes you need to withdraw money from the business to help with personal expenses. Do not do this haphazardly—try to plan for it. Estimate the amount you need to take out each month. Be conservative, taking as little out as you can.

A number of entrepreneurs opt to not pay themselves anything for their work in the business, and instead to periodically withdraw money from the business to pay some bills. It would be better if you did pay yourself a regular hourly rate or monthly salary, and treat this as a business expense. It will better enable you to determine your operating costs and set your prices at an appropriate level.

If you know that you need to take money out of the business on a regular basis, then it will increase how much you need to sell in order to both breakeven (see STEP 15) and take this amount out. Here is a simple way to calculate how much you have to sell. Let’s assume you need to take $1,500 out of the business each month to help cover some of your personal expenses. Then you just add this amount to the numerator of the breakeven formula:

Required Level of Sales= (Total Fixed Costs + $1500)/Contribution Margin