Business Analysis

The purpose of this project is to look at the economy from the perspective of an entrepreneur getting ready to start a business. The business should be something that you could operate out of a dorm room or in a small retail outlet at strip mall. To keep things simple, you should focus on one product or service. So, if you choose a nail salon, focus on making a profit from a manicure, and ignore sales from cosmetics or other possible sources of income.

The overriding issue to think about in your business is, "How can we make money selling this product or service?" That means being able to calculate your costs and revenues in a comparable way. For example, if you had a lemonade stand, you could compare your hourly costs with your hourly revenues. Or you could compare the cost per quart of lemonade to the revenue per quart of lemonade. What is not helpful is to compare revenue by the quart to cost by the hour. I call this ratio analysis

Your team will have 15 minutes to present your analysis of a business idea. The analysis should answer the following questions:

  1. What will your customers pay for? How much will they be willing to pay for it?
  2. Economists say that the "factors of production" are land, labor, and capital. Explain how these concepts apply to your business. Which factor is likely to be the most costly in your business?
  3. What will be the most difficult hurdle in starting the business?
  4. Will you have to hold inventories (supplies of goods that you intend to sell)?
  5. What will be the critical management functions in the business?
  6. What would an experienced person in your business know that you don't know?
  7. What are the ratios that you use in your ratio analysis? Are they comparable? What numbers do the ratios need to hit in order for the business to make a profit?

For example, if you were starting a for-profit high school, a customer would pay for nine months of school for one child. (Alternatively, you could charge by the course. Or you could charge based on how well the child does on standardized tests.) You might estimate that a customer would be willing to pay $15,000 a year. The land would be the grounds (of course, if you rent the building, you might write a single check that covers the building as well as the grounds, but the building is technically capital). Capital would include desks, chairs, and computers. Labor would be teachers and counselors. Students per teacher would be a key ratio. The most significant up-front hurdle might be obtaining certification from appropriate authorities. Inventories are not an issue. The key management functions would include regulatory compliance, staffing, marketing, and customer relations (making sure parents are happy). An experienced person would know how to recruit and retain teachers, how to attract customers, how to deal with difficult students and parents, and how to implement a plan for steady growth in enrollment.

For this school, we might look at revenue and cost relative to one course. If each student takes 12 courses per year, then the student is paying $15,000/12 = $1250 per course. If there are 20 students in each course, then the revenue per course is $25,000. If a teacher is paid $80,000 per year, including benefits, and each teacher teaches 10 courses per year, then the cost per course in terms of teachin is $8,000. Suppose that the other costs, including building revenue and overhead, are $10,000 per course. Then the profit per course is $25,000 - $8000 - $10,000, or $7000 per course.

Business Ideas to Choose From

Feel free to come up with your own idea. Try to stay away from the grandiose or the innovative. Instead, think in terms of the kinds of businesses that you see in strip malls. Think local, as opposed to national.

Below are some ideas for businesses.