We’ve heard stories of penniless immigrants who came to a new country with nothing but a dream, but within a single generation accumulate a lot of wealth. How do they do it?
This is a mystery to the typical person who graduates with a post-secondary education and goes on to work in the labour force as an employee (i.e., most people!). This is because our educational system specifically trains its students to become employees rather than entrepreneurs.
So when we hear about these rags to riches stories, we ask ourselves — “how did they do it?” As someone who grew up in an entrepreneurial household, here is my take on Cracking the Code to Successful Entrepreneurship:
1. In most cases, one will never become truly financially independent working as an employee. Whether you are an entry-level bookkeeper or the CEO of a large organization, you can be unexpectedly fired at a whim by whoever you report to. You are therefore susceptible to financial catastrophe.
2. Therefore, the only way to achieve financial independence is to build and maintain a successful business.
3. There is a “magic formula” that will allow to evaluate a businesses’ odds of success:
[(Sale price of product — Variable cost of product) x Units sold] — Fixed Overhead Costs = Profit
This formula will be very familiar to accountants — it’s called the Contribution Margin Ratio.
Let’s demonstrate this formula using a Bubble Tea business. Wonder why there are so many Bubble Tea shops in Toronto, Canada? Because they make a heck of a lot of money with little risk:
· Price per bubble tea drink — $4.00
· Cost to make per drink (water, powder, sugar) — $0.50
· Drink sales per month assuming 100 sold per day — 3,000
· Monthly rent for shop — $3,000
· Assume no labour costs — in the early years, the owners will work the shop themselves
· [($4.00 — $0.50) x 3,000 ] = $10,500 in sales
· Profit after paying rent: $10,500 — $3,000 = $7,500
Once you apply this formula to the Coca Cola Company or PepsiCo to analyze their beverage businesses, you can begin to understand why soft-drinks companies have grown from humble beginnings to global companies they are today.
You can also use this formula to evaluate almost any small business you might be thinking of getting into: restaurant, nail salon, hair salon. You should quickly realize that it’s best to choose businesses with a high profit margin (i.e., high selling price for produce/service and low cost of supplying the product/service) and high customer traffic (i.e., units sold, people serviced).
So for all you aspiring entrepreneurs out there, I hope that I’ve helped take out some of the “mystery” behind successful entrepreneurship. Use this tool wisely and never stop dreaming!