Many people get it wrong. The first step in starting a business is to do two calculations.

The first step in starting a business is not finding a location or assembling a team, but rather carefully calculating the finances. Otherwise, if the business fails once, all the money will be lost, and it will be difficult to recover afterward.

Never put all your eggs in one basket when doing anything.

Since there are no 100% certain outcomes, many entrepreneurs who succeed aren't necessarily the most skilled—they just have a lot of luck.

The best situation for starting a business is when you've already accumulated enough experience while working, have existing clients, or can quickly develop new ones.

When I quit my job to start my business, I had been preparing for years, had enough savings to support myself for several years even without income, and felt confident enough to take the plunge.

Another important factor was that I already had a side business while working, providing marketing consulting for other brands, which generated decent income. Starting a business was simply formalizing that side business and gradually scaling it up by hiring a team.

Within about half a year, I stabilized the business.

Overall, the transition from working to starting a business was relatively smooth for me.

However, some people may not have the same experience. They are overly optimistic, believing they can recoup their investments and turn a profit quickly. The reality is that 90% of startup failures stem from various causes of cash flow disruptions.

For example, the products or services developed lack market demand, revenue is low, costs are high, business operations are not smooth, or team management issues arise, among other factors.

Any of these issues can lead to cash flow disruptions and startup failure.

I once knew a restaurant entrepreneur who rented a 500-square-meter storefront, hired a restaurant operations team and chefs, spent hundreds of thousands on renovations, but after three months of operation, there was little foot traffic, and eventually, they couldn’t afford the rent and wages and were forced to close.

Once the market turns sour, the cash flow breaks down quickly, and the business spirals out of control. Especially in recent years, I’ve seen many such cases around me.

If you want to start a business, you must calculate two key factors.

The first calculation is the big picture of the market.

This calculation addresses whether the project you want to start has a market, whether it can make money, how much profit it can generate, and what your advantages are. It determines whether the startup project is feasible.

By calculating the market accurately, you will know what projects are viable and which are not, allowing you to focus your limited resources on your strengths and increase your chances of success.

If you find that the market is small, margins are low, competition is fierce, and you have no unique advantages, cut your losses immediately!

This calculation almost determines the survival of the startup project. Don’t rely on intuition; use facts and data to make decisions.

Without research, you have no basis for judgment.

1. How big is the market pie?

What is the annual scale of the niche market you’ve targeted for your startup? What are the users’ genuine needs? Are the pain points truly significant? How can you quickly validate this?

Market capacity: For example, the annual consumption of a high-end pet grooming market is approximately 10 million;

User pain points: For working professionals who lack time to groom their pets, leading to matted fur, they are willing to pay a premium;

Market validation: For example, search for high-end pet grooming businesses on Xiaohongshu, and investigate from multiple dimensions such as the number of businesses, product sales volume, product unit price, user reviews, and user preferences.

2. Where is the profit ceiling?

What is the gross margin? For example, if your product or service sells for 100 yuan, after deducting direct costs such as raw materials, production, and marketing, how much is left? If it’s below 50%, be cautious unless sales volume reaches a scale effect.

Profit model calculation: How much monthly revenue is needed to cover all costs, i.e., reach the break-even point? When reaching the industry average revenue level, how much profit can you make?

3. What is your competitive advantage?

What are your competitive advantages: Why are you winning? Is it because your product is superior or your technology is unique? Do you have a low-cost supply chain? Or do you offer an unmatched service experience?

Your competitors' weaknesses are your opportunities: What product flaws do your competitors have? What is their cost structure like? What aspects of their operations are criticized by customers? Which user segments have they overlooked? Which marketing channels have they not optimized?

Second, calculate the operational details

The market focuses on the future, while cash flow management focuses on the present.

During the startup process, you must always monitor the company's cash flow.

If the startup lacks stable income over the long term, it may indicate issues with the business direction, product, market, or marketing, and adjustments should be made promptly.

Conduct a simulation: how many days can the current cash reserves sustain the company in an extreme scenario with zero income?

1. Revenue side: Where does the money come from?

Is the revenue structure clear? Is the primary revenue source concentrated in 1-2 core products/services, or spread across multiple channels?

In the early stages of entrepreneurship, it is best to focus on a few areas to minimize additional costs.

Is the income stable? Which sources provide relatively stable monthly revenue, such as repeat purchases from existing customers or long-term subscriptions? Which sources are uncertain?

The higher the proportion of stable income, the lower the entrepreneurial risk.

Profitability threshold: If there is no stable cash inflow for 3-5 consecutive months, do not hesitate! Either the product/service has issues, or there are problems with the market/marketing strategy. Immediate adjustments must be made, or the venture should be evaluated and potentially abandoned.

2. Expenditure side: Where does the money go?

Cost expenditure situation: Rent, wages, and platform fees are fixed expenses that cannot be avoided; marketing expenses and welfare costs are flexible expenses that can be adjusted based on actual circumstances.

Record every transaction: Keep track of every cash flow, monitor revenue reports, and stay informed.

3. Simulating extreme scenarios

If revenue were to drop to zero today, how many days could the reserved cash sustain project operations? What methods are available to secure funds promptly?

In the early stages of entrepreneurship, it is best to ensure that cash on hand can cover at least six months of fixed expenses. If less than six months, immediately seek funding, collect outstanding payments, reduce expenses, or suspend the project. Prioritize survival to remain in the game, as this will provide opportunities for recovery in the future.

If you have any questions regarding entrepreneurship, please leave a comment for discussion!