Demystified Blog Archive #39 – Mind Your Own Business (Part II)

Demystified Blog Archive #39

Mind Your Own Business (Part II)

Stock markets around the world are at all-time highs. Bond markets are at all-time highs. Real estate is at all-time highs.

If you own assets you’ve done extremely well.

But if you’re in the rapidly deteriorating middle class, especially the lower middle class, you haven’t.

Looking at the United States, for example, it seems quite strange that the stock market is near its all-time high while the overall economy has been sluggish for years.

Annual GDP growth for the United States in 2016 was a measly 1.6%, a rate that barely keeps up with population. And global GDP growth has been low for years.

This has had a significant impact on employment and wages.

Central bankers and politicians tout that the unemployment rate in the US is at a 10-year low.

Awesome!

But it’s easy to see a different picture when you look deeper at the numbers.

According to data from the US Labor Department, for example, the percentage of Americans in their prime work years (between the ages of 25 and 54) who actually have jobs is still way below the level prior to the 2008 Great Recession.

In addition, debt levels are hitting record highs such as student debt, consumer debt, auto loans, etc.

And people are, once again, unable to pay their debts.

Over the last 12 months, for example, Capital One’s net charge-offs increased 40%.

So, how can we hedge our risk in this volatile, high risk environment?

Again, mind your own business. Last week we touched on the mindset of an entrepreneur. If you think you have what it takes, let’s move forward to a few of the basics concerning the numbers.

The first thing we always do when analyzing a new business idea is to make sure the idea actually pencils. That is to say, if it looks feasible, we can continue to move forward. If it does not look feasible we can simply discard the idea. As we know, time is money.

Here is a quick way for your new business idea to pass the litmus test.

Begin with the end in mind.

The first question we must ask ourselves is “how much does it cost me to live?” With this information we can determine how much we need to pull out of our business each month to give up that 9 to 5.

The second question we must ask ourselves is “what is my break even threshold?” The basic formula for computing break even goes as follows:

Cost to live + operating costs + capital investments + debt service = break even.

Of course, this is a very simplified version of the calculation. Every person, business, industry, etc. will be different and/or require additional details.

The third question we must ask ourselves is “what is my sales price per unit, service, etc.?”

To determine the number of units, services, etc. we must sell each month to break even we compute as follows:

Break even threshold / price per unit, service, etc. = number of units required to break even.

This piece of information is very important because it will give us a quick realistic projection of whether our business idea is doable or not.

Next week we will touch on the actual planning and benchmarking of the business.

Of course, there is always additional information you should consider when starting a business. And, you should always be working with a team of professionals to help mitigate the risk of any investment.

To your investment freedom