Throughout my life as an entrepreneur, I have read tens of books, listened to hundreds of lectures, and discussed the topic of creating a million dollar business with handfuls of entrepreneurs. Each time, the conversation goes in a different direction dependent upon the source.
When beginning to work on a new idea, one of the most important factors to understand is the potential of the idea and what it will take on a daily basis to achieve a financial milestone. If that financial milestone is reaching a million dollars in business each year then you should figure out how much money you need to earn each day to make it a reality. It’s foolish to waste your time on a new endeavor if the financial viability is doomed to fail.
What You Will Learn
In this post, I offer a strategic approach to understanding whether your business has the potential to recognize $1,000,000 in revenue in any given year. When you are considering starting your own business, utilize this method to realistically understand how much money your idea can make. You’ll be surprised at how quickly you may change your mind about starting the business.
My Experience Dealing with Financials
When I started building Portlight with my co-founders at Quinnipiac University, I was always intrigued by the thought of reaching $1,000,000 in revenue in a given year. At the time, I still didn’t fully understand the financial side of managing the business and I was in the process of learning key practices through my education as an economics, business, and mathematics student.
I also wasn’t at the point where I was personally recording the company’s daily run rate yet so the numbers only became real when we input all of the transactions we were making into QuickBooks once a month. Even then, everything wasn’t 100% clear.
Over the years, we became much more intelligent and more invested in the growth of the company. I started to play with the company’s financials on a regular basis, we split up financial responsibilities within our founding team to best check and balance our performance, and we hired a bookkeeper and accountant to handle all of our financial organization.
It was around this time that I attended a local event where an even more veteran entrepreneur, Matt McBride, was sharing his advice on building a business. In his presentation, he touched upon the importance of determining what it will take to achieve your financial projections. From the can of worms that he opened, I returned to my apartment, grabbed my notebook, and started to build upon the method that he had presented.
How to Determine if you Have a Million Dollar Business Idea
Step 1: Set a financial goal that you want to reach
Think about where you want your company to be in the next year and calculate a realistic financial goal to strive towards. For the sake of our example, we are going to use $1,000,000 in revenue.
Step 2: Break that goal down into quarterly, monthly, weekly, and daily revenue figures
By applying simple mathematics, we can gain insights into how much we would have to earn in any given time period to achieve our ultimate goal.
Quarterly Run Rate = $1,000,000 / 4 = $250,000
Monthly Run Rate = $1,000,000 / 12 = $83,333
Weekly Run Rate = $1,000,000 / 52 = $19,230
Daily Run rate = $1,000,000 / 365 = $2,740
With a better understanding of the required revenue earned to achieve $1,000,000 in sales over different time periods, you gain the ability to then break down the number of sales that you will need to generate in order to achieve that goal.
For businesses with a smaller average sale price, they will need to generate significantly more volume to achieve their financial goals. On the contrary, if you are a business with a high average sale price then the volume needed will be significantly lower. These factors can impact how you decide to price your product or service.
Step 3: Calculate how many sales you will need over each time period to reach your goal
Number of Sales Needed = (required run rate) / (average sale price)
For the purposes of our exercise, let’s assume that our average sale price is $100.
Quarterly sales needed = $250,000 / $100 = 2,500 sales
Monthly sales needed = $83,333 / $100 = 833 sales
Weekly sales needed = $19,230 / $100 = 192 sales
Daily sales needed = $2,740 / $100 = 27 sales
Once you have determined the number of sales that you will need to sustain per day in order to achieve your yearly goal, it is important to study your current performance and research your target market.
From our exercise, we calculated that in order to achieve $1,000,000 in sales over the first year of business, you must make 27 sales per day at $100 per sale. Is that achievable?
While it is exciting to know the figures that you need to achieve, it is far more important to discover whether they are realistic based off of your idea.
Questions to Ask
- Can you achieve the daily sales requirement?
- What is your strategy to make it happen?
- How much is it going to cost you to achieve the goal?
- How large is your target market? How much of the market do you need to capture?
Step 4: Calculate the Gross Profit Associated with your Sales Goal
Sales goals are great, but it isn’t the money that you will actually earn at the end of the day. Let’s assume that on each sale, you earn 30% of the total sale price. From our example above, you would earn $30.00 on each sale of $100.00. When you apply the 30% margin to the business making $1,000,000 in sales, you would earn $300,000 in a given year of business.
With that money, you now have to pay all of the expenses of your business. These can include payroll expenses for you and your employees, office rent, technology, and other administrative expenses.
At the end of the day, the business may only produce a net profit of $100,000 on the $1,000,000 that it earned in sales. The lesson I leave you with here is that building a $1,000,000 business in terms of sales does not mean that you are going to be adding $1,000,000 to your bank account.
Advice for Starting your own Business
I have used this method times while testing new business ideas. I have found it helpful to understand whether the idea that I have has the potential to become a significantly profitable business or if I am better off focusing my energies elsewhere.
Before investing all of your time and energy into a new idea, take the time to set strategic financial goals. Do your homework and determine if your idea can realistically meet your financial vision.
If it doesn’t appear to be the best of situations, swallow your pride and consider moving onto a different venture. We all have the ability to build million dollar businesses…we just need to take the proper strategic measures to ensure our path is realistic.
If you want to learn more about building your own financial strategy before diving into starting your own business, shoot me an email at Connor@ConnorGillivan.com. We can break the numbers down together and determine whether you are on the right path.