Blackpool Unlimited’s Kriss Wilson has helped hundreds of business owners across Blackpool and the Fylde Coast turn their ideas into successful businesses. One of the questions she’s asked most often is “will my idea work?” And that usually means one thing: ‘will I make money’?

Not every business needs to have an end goal of making millions. But every business needs to make money to make trading worthwhile. “There are a lot of ingredients to ensuring a business makes money,” explains Kriss “and one of the most important is understanding your costs.”

Understanding your costs from the outset can help you understand whether your business is viable. It can help you set the right price for your product or service. And if you keep a tight control of your costs, it can help make sure your business stays in profit.

Here are two examples of how understanding costs could help two very different businesses succeed.

Will My Business Idea Work?

Example one: selling a handmade product

You have a plan to sell hand knitted/crocheted blankets. You’re going to make them yourself and, to keep costs down, you’re making them at home. You’ve looked online, and the going rate is about £40. You decide to charge the same. But that’s before you work out exactly how much each blanket will cost you.

The wool for each blanket costs you £5. You’ve selected some basic plastic packaging that only costs 20p per blanket. You’re not spending any money on premises, which is a big saving.

Of the £40 you’re charging, you still have £34.80 left.

But then there’s the labour to think about.

It takes you about 6 hours to make each blanket. Divide the £34.80 by the time you spend and you’re earning just £5.80 an hour.

That is much less than minimum wage – and why should you settle for that?

If your business took off, you’d never be able to make more than a couple of blankets a day. If you hired staff to do it for you, by law you’d have to pay them much more than £5.80.

Understanding your costs can help you find solutions and compromises. Here, those could be:

Charge more: Suppose you improved the quality of the packaging, so it looked and felt as good as the blanket it contained. The packaging might cost you £1 per product, rather than the 20p you’re currently paying. But creating something that looked premium could enable you to charge much, much more.

Change the product: Operating on existing costs and prices, your blanket idea just won’t earn you enough money. Yet you love crocheting and want to stay in that world. Rather than selling the blankets, how about selling crocheting kits so that your customers can do it themselves? You’ll still have to pay for wool and packaging – and you’ll need to pay a fee to whichever online seller you use to sell your products. But you can sell each kit for £20+ and creating new designs and packaging up the kits takes a lot less time.

Automate: If you focused less on the ‘handmade’ and more on the quality of the wool, or the design, or the look and feel of the blanket, you could automate. Using a machine (or two) could help you produce lots of blankets in a fraction of the time. That increases your costs, of course, but by selling many more products, it could be worth it.

Will My Business Idea Work?

Example two: running a hotel

You’ve always liked the idea of opening your own hotel. You’ve found a small 8 bedroom hotel you’d like to take on, but only by understanding the costs can you understand how to make a profit.

Let’s look at the maths.

• Rent or mortgage: £15,000 per year
• Business rates: £2,000 per year
• Utilities: £2,000 per year
• Alcohol/music licences: £1,000 per year
• Maintenance and refurb costs: £2,000 per year

Then, you need to pay for insurances, supplies (from sausages and pillowcases to loo roll), contracted services (who’s going to be washing all those bed sheets?) and, of course, one or two staff to help you and give you the occasional day off.

Let’s assume that, all in, you’re looking at £50,000 each year just to break even. Add a £20,000 profit (because you’d quite like to make some money out of this) plus your corporation tax, personal tax and other costs and you’re creeping close to £100,000.

First, you’ll need the money and the credit score to get up and running.

Then, you need to understand how to make £100,000 out of your hotel.

You won’t open every week of the year, but you may open from Easter to New Year. That gives you about 39 weeks to play with, but you know you won’t be full all the time.

Here’s some more quick maths.

• £100,000 / 39 weeks = £2,564 your hotel needs to clear each week
• £2,564 / 8 rooms = £320.51 each of your rooms needs to earn each week (or £45.79 per night). Realistically, they’ll need to earn more in busy weeks to cover for quiet ones

The figures show that your hotel can’t be a £20 budget place, because you won’t make enough money. So what are your options? Here are just a few.

Charge more: There are a lot of hotels locally. To charge more than those around you, you need to offer more than those around you. So what could you offer that won’t cost a fortune to implement? Play to your hotel’s (and your own) strengths. The quality of the rooms, the quality of the food, the sea view, the warm welcome, the local knowledge and advice or the little touches that add up to a big difference – they could all help you charge a little more per room.

Increase occupancy: Summer’s busy, but spring and autumn are less reliable. What events could you offer to help bring in more people throughout the year? Piggybacking on local events or running your own could help boost takings.

Create more rooms: You’ve only got 8 rooms. But 3 of them are huge. Could you split them and create more rooms? Balance the cost of building work with the potential to bring in more paying customers each week.

Being clear on the costs involved in opening any business is vital. Get Started has helped hundreds of people get their businesses started in Blackpool – and we can help you get to grips with understanding your costs.

If you’re planning to launch your own business, we’re ready to help – for free. To ensure you’re prepped and ready for success, talk to Kriss Wilson now or call 01253 477147.