new business module

82
BUSINESS SKILLS
Once entrepreneurs have defined their business idea, they
must assess its financial viability, i.e. whether it is likely to generate
a profit. This module explains how to determine financial
viability; participants learn how to estimate their potential
income, costs and profit. 15
Session 1: Estimating income
1.1 What is income?
Income is the amount of money a business generates by
selling its products. It depends on the price of the products
and the number of products sold.
• Income = Price x Quantity
To estimate income, entrepreneurs need to define a price and
estimate the quantity they are going to sell during a certain
period. Because starting entrepreneurs have no experience
selling their products, estimating their sales is a challenge.
It is best to estimate monthly income, because in many businesses
sales show significant seasonal variations. Moreover,
monthly estimates allow starting entrepreneurs to discover
any financial problems quicker than bi-annual or yearly estimates,
by comparing effective income to their estimates on a
monthly basis.
1.2 How to estimate income
There are various ways to estimate future income in the
absence of any past experience. Possibilities are:
• asking entrepreneurs who run similar businesses;
• observing the number of customers other businesses
have and asking about their purchases;
• assuming it is possible to sell the entire output;
• asking suppliers of material how much raw material
they typically sell to similar businesses;
• asking entities like the tax authorities, chamber of
commerce or microfinance institutions.
15 This module is based on IFRC (2001) and BDS (2008c).