THE "RULE OF 4-1/2" - A GUIDE TO
DETERMINE HOW MUCH MONEY YOU WILL
NEED TO MAKE A PROFIT
by Alan J. Zell, Ambassador of Selling

While called a "rule," this is to be used only as a guideline of the time and money it takes before a beginning business will begin to show a profit.

For product businesses: Take the 3rd year's (months 25 through 36) projected sales (D), multiply that by 4 1/2 . This is approximately the amount of money (between ones personal investments, borrowed funds, and money from sales) that will be needed to get a business started, through development, on the market, through 3 years of business, and to make a profit.

For service businesses: Take the 3rd year's (months 25 through 36) projected sales (D), multiply that by 3 1/2 . This is approximately the amount of money (between individual investments, borrowed funds, and money from sales) that will be needed to get a business started, through development, on the market, through 3 years of business, and to make a profit.

Approximately 60% to 75% of the total will be spent on development, production, and marketing before reaching the market.

Starting a new department, line or service should be looked upon as being a "new business within a business." The above guidelines are applicable with some adjustment because some of the activities may already be in place. For departments, products or lines the ration may be x 3 1/2, for services x 2 1/2.

For a new employee: The 3rd years (months 25 through 36) projected salary (D) X 4 = the amount of money (between salary, benefits, supervisory workers time, poor productivity, duplicated work, mistakes, lost sales, and disgruntled customers) that will be invested in the employee during the first 3 years. Spending time, effort, and money for training to develop the employees' knowledge and skills before giving them full responsibility will decrease the costs associated with mistakes, lost sales and customers and clients.

When moving an employee into a new department or major job shift the ratio may be x 1 1/2 or x 2 before their efforts will begin to produce a profit or have a positive effect on the business.

How to apply these ratios. When looking at business plan or plan for change and the figures projected show that too much money is needed, it is time to see where the "holes" are in the planning . . . to aggressive projected sales, omission of costs not included, certain positions not accounted for, etc.

This article was written to help you and your business. If you believe some of these articles will be helpful to your business, please e-mail me your comments on how you will apply them. ajz

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Copyright © 2000-2007 Alan J. Zell, Ambassador of Selling, Portland, OR. All rights reserved.

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