Investment plan: what must we buy first?
Investment here means money spent to start or grow a business: equipment, a first stock of materials, a stall, a website. The investment plan is a simple table listing every item, its price and the total. This total is the start-up cost.
Costs can be one-time (a stall) or running (ingredients). The plan should also keep a little extra for surprises.
Where does the money come from?
- Own savings: no interest and no repayment, but it is your own risk.
- Loan: money from a bank or a family member that you must repay, usually with interest.
- Grant: money from a school, government or charity that you need not repay, but you often have to apply and follow rules.
- Crowdfunding: many people give small amounts through a website or event, often for a reward or a share of the product.
- Investors (extra): someone gives money for a share of the future profit.
A good plan makes sure the sources add up to at least the start-up cost: sources โฅ costs.
Financial plan: revenue and costs
Revenue (sales) = price ร units sold. Direct costs (cost of goods sold) are what the goods you sold cost you, like lemons and cups. Other costs (overheads) do not change with each sale: rent, posters, electricity.
Gross profit and net profit
Gross profit = Revenue โ Cost of goods sold.
Net profit = Gross profit โ Other costs.
If net profit is below zero it is a loss. Net profit is what the owners can keep, save or share. Loan interest and tax, when they exist, are also taken away before the final profit.
Break-even is the sales level where net profit is exactly zero. Learn more in Business planning.
Key formulas and definitions
- Start-up cost = sum of all things bought at the start
- Sources of money โฅ start-up cost
- Revenue = price ร units sold
- Gross profit = revenue โ cost of goods sold
- Net profit = gross profit โ other costs
Worked examples
1. A stall needs a table 40, ingredients 30 and posters 10. What is the start-up cost?
40 + 30 + 10 = 80.
2. You have savings of 30 and a grant of 20. How much more do you need for a cost of 80?
30 + 20 = 50. 80 โ 50 = 30 more is needed, from a loan or crowdfunding.
3. You sell 30 cups at 4. What is the revenue?
30 ร 4 = 120.
4. Each cup costs 2 to make. For 30 cups, find the gross profit.
Cost of goods = 30 ร 2 = 60. Gross profit = 120 โ 60 = 60.
5. Other costs are 30. Find the net profit.
Net profit = 60 โ 30 = 30.
6. You sell only 10 cups at 4, cost per cup 2, other costs 30. Find the net result.
Revenue 40, goods 20, gross 20. Net = 20 โ 30 = โ10, a loss of 10.
7. What price per cup makes net profit zero if 30 cups are sold, cost 2 each and other costs 30?
Gross must be 30: (p โ 2) ร 30 = 30, so p โ 2 = 1 and p = 3.
Common mistakes
- Confusing revenue with profit. Revenue is all the money in; profit is what is left.
- Forgetting the loan has to be paid back, so it is not free money.
- Leaving out other costs (rent, posters) and calling gross profit the real profit.
- Having sources below the start-up cost. The business cannot even open.