Dealing with Money


Here is a quick guide you can use to figure out how much of an investment you need to ask for from the investors.  It might sound a little complicated, but just take it one step at a time and read all the way through each sentence.

1.  How much will it cost to make your product.  A simple way to guess the cost of manufacturing is to find an inexpensive version of your design that already exists and divide its price by 4.  For example, if you see an alarm clock selling for $8, you can infer that it would cost you $2 to manufacture it yourself.

2.  How many units would you like to make?  If you decide you want to make 20,000 units, then you would multiply 20,000 times $2.  So it would cost you $40,000 to manufacture your 20,000 alarm clocks.

3.  What is your salary?  Are you going to work for free?  Will each person in your group get paid $30,000 a year?  If so, you would add 3 x $30,000, or $90,000 to what it will cost to make the product.  Or maybe you decide not to take a salary at first and get paid later with the profits.  It's a risk, but asking for less money from the investors means you get to keep a larger percentage of the profits down the road.

4.  How much will you sell one unit for?  What do your competitors charge?  What do you think people are willing to pay for your product?  Let's say you are able to sell your alarm clocks to Target for $5 each.  If you sold all of your alarm clocks that would be 20,000 x $5, or $100,000.

5.  What is your profit margin?  To find your profit margin, just take how much you can sell one alarm clock for and subtract that number from what it costs you to make.  In other words, you would would do $5 - $2 and your profit margin is $3 per unit.

6.  How much profit will you make?  We already know you made $100,000 (Gross) when you sold your alarm clocks to Target, but you don't get to keep all that money.  Remember, it cost you $40,000 to make your alarm clocks, so you have to subtract that $40,000 from $100,000.  That means you made $60,000 profit (Net).

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