Simple Cost-Profit Analysis for Home-based Entrepreneurs

Businessman accountant making notes at report doing finances and calculate about cost of investment and analyzing financial data, growing business to profit and saving with wealth management.

Indeed, the pandemic has spawned all sorts of business ideas executed by people while at the comfort of their own homes. Some have revisited their own hobbies – cooking, designing & gardening, to name a few – and have begun selling their output to their neighbours. Especially if you are torn among different business ideas you can pursue, it’s important to have a tool you can use to know which to prioritize. If you can only pursue one & you know your time is limited, it calls for an even greater need to make an analysis before you make your decision.

The great news is that it doesn’t have to be complicated. As long as you know your expected costs & revenues, you can perform your own comparisons.

Step 1: Know your costs.

For simple businesses, there are typically two types of cost: investment & operating costs.

Investments are those pay-outs that you have to do before you can even start your business. Examples are purchases made for equipment (e.g. baking tools, machines, etc.) or if you are not yet 100% familiar with the skills needed, training costs (e.g. online courses). These costs typically accumulate to a fixed amount, paid out before operations actually start, and do not appear again later down the line.

Operating Costs are the recurring expenses you incur as you are already running the business. One classification of operating costs are fixed costs, or those that do not depend on the quantity of product you produce. Examples are rent for your facilities, wages, utility bills & membership fees to platforms/selling communities. Fixed costs are usually computed on a monthly basis.

The other type of operating costs are variable costs, or those that depend on how much you actually produce. Examples are inventory expenses (such as ingredients & containers) & delivery costs. These are computed on a per item sold basis.

Sample Costs for a Home Entrepreneur Selling Home-cooked Meals

Step 2: Know your revenues.

To know your revenue in a given month, you need to know for much you will be pricing your product & your expected demand. Use below formula to compute:

Revenue = No. of Units Sold x Price

The difficult part in this is actually projecting how many you will be able to sell. You can explore e-commerce platforms to see how well the products you are planning to sell perform in the market. You can also consider the size of the community to which you will be selling (is it an entire village or just 1 condo?), as well as the ongoing perceived demand for your products (Pinoy dishes are probably more in demand than Thai dishes).

Step 3: Set a timeline & find the value of the project.

For below example, we are eyeing a 6-month period for the project. Suppose a home entrepreneur is selling dishes at a fixed price of P150 per dish over a 6-month period & the variable cost of producing 1 dish is P60:

To compute the total value or profit of the project, just add all revenues for this period & subtract all expenses. For this project that sells a total of 480 meals during the 6-month period, the total value/profit is:

This project will have a total value of P32200, which makes it a worthy pursuit.

If you are eyeing multiple projects but can only pursue one of them or a limited number, you can perform this exercise per project and compare the values you’ll get. Practically, you should pursue the project with the highest value.

Oftentimes, the investment & costs required of a project can depress the short-term value of a project. For example, if you are comparing opening a full-blown restaurant versus maintaining a food delivery operations at home, you will take a longer time to recoup your investment for the restaurant project. In this case, either you extend the time period of perspective (say, extend the time period to 2 years) or to find another project with a similar investment requirement as opening a restaurant.

While there are many hidden costs to running different projects that these calculations will not be able to account for, such as stress & anxiety, this cost-profit analysis will help you determine if all those expenses & sacrifices will pay off in the end. So get those ideas running and find your inner confidence to start a business now!

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