A reader asks:

Can you suggest some profitable business ideas please? I’m mostly interested in ideas for Internet businesses.

If an idea doesn’t have the potential to be profitable then I’d argue that it’s not a business idea – it’s a bad idea.

So how do you determine if a business idea is profitable?

To be profitable a business needs to:

• sell its product (or service) for more than the total cost of selling it;
• sell enough of it’s product to cover the costs of the overheads and generate a profit.

One mistake many entrepreneurs and small business owners make is selling a product for more than the it costs, but less than the total cost of selling it. In other words they forget to take into account the cost of the businesses overheads.

The price of your product needs to include the direct costs of the product plus  a contribution towards the overheads incurred by the business. The overheads are things like things like heating, lighting, rent, rates, wages, marketing and advertising costs. A good management accountant should be able to help you determine what your overheads are and to determine what contribution each product needs to make towards them – which will depend on the expected number of sales. If you’re starting a new business then it’s worthwhile talking to other similar businesses and trying to find out from them what their overheads are (direct competitors probably won’t tell you but similar business in a different location or market might). You can also often find out by getting a copy of their accounts from Companies House, or even their own website if they are a listed company. Alternately allow a reasonable estimate in your business plan.

Having worked out the required contribution towards overheads In order to be profitable for a planned level of sales, you need to ensure that you achieve that level of sales and ideally exceed it. So once you’ve worked out how many products you need to sell ask yourself can I achieve that level of sales given the resources I have?

If the answer is yes then you have a profitable business idea, if it’s no, either start looking for a better idea or the resources the make your idea profitable.

As for ideas, you might be interested in browsing through the list of business ideas that I’ve previously written about and in particular the Internet business ideas.

Asking John:
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