Many entrepreneurs plunge into a business venture so blinded by the dream that they fail to thoroughly evaluate the true potential of their business idea.
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If you are contemplating starting a business, take the time now to start understanding how much money existing businesses make.
By going through this thought exercise, you'll get good at assessing business potential in the abstract and can apply the thought process to your own ventures in the future.
For example, down the street from our Chicago office building, there's a parking lot. Most people walk by that parking lot and don't think much about whether the parking lot is making money or losing money.
An entrepreneur in the making should think about things like this.
Hmmm...the parking lot is jam-packed today, as it is every day.
They've got 20 cars in one row.
How many rows do they have? Wow. There are thirty rows in the parking lot, so they are parking 600 cars per day.
To park for the full day, it costs $11. So, it looks like the parking lot down the street is grossing $6,600 per day.
I only see one attendant on the lot and I bet their attendants make no more than $8 per hour. If they pay attendants for twelve hours per day, that knocks their daily revenues down by $96.
So, let's call it $6,500 per day in revenues. Using twenty days per month, that's $130,000 per month. Nice.
What other expenses does a parking lot have? Probably insurance and the property taxes, of course.
I have no idea what the property taxes on a Chicago parking lot of this size would be. It's not quite as big as a city block - maybe half a block. If you had ten houses on this lot, and each was paying $8,000 per year in taxes, the total property taxes would be $80,000 per year.
Or maybe a better estimate for parking lot property taxes is 5% of the appraised value of the property. I ballpark the parking lot property value at $5 million, so that would suggest $250,000 in annual property taxes. That sounds more accurate.
Let's call it $240,000 to make the math easier. So, it's $20,000 per month in property taxes.
I had figured out they were maybe making $130,000 per month in parking lot revenues, so, less the property taxes, they still are pulling in $110,000 per month.
Wow, that's $1.32 million that they can use to pay off any debt they have on the property. Seems like that would more than cover the bank debt and still leave a huge profit.
Maybe they bought the parking lot property for $2 million and financed most of it. So, they are probably paying $250,000 per year on the mortgage or something like that.
Still, they are netting just over $1 million on this parking lot per year. Now, that's a nice business!
You get the idea. My math above might be off by quite a bit - maybe a Chicago parking lot business expert will chime in with some better numbers - but the point is not that you should go off and open a parking lot.
Rather, the point is that if you want to be an entrepreneur start thinking all the time about money, businesses and how much money businesses are making.
If you do that, you'll find that when you finally do start a business, you will be thinking about it in the right way - with profitability in mind.
Don't be blinded by the entrepreneurial dream.
Instead, get your spreadsheets and your calculators out and work through the numbers…long before you open your doors for business.