Smart business owners take advantage of opportunities, and that includes launching new products and services. Before you start promoting your new product, do some planning. Create a budget, and see how the new line of business fits into your overall budget. If the new product will use some of your existing resources, what is the impact on your other business lines? Use these tips to make an informed decision about launching a new product or service.
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Growing a business
Financial impact of launching a new product
Meet Joe
Joe operates Twin Lakes Tree and Lawn Care, which provides several types of service to customers. Twin Lakes trims and removes trees, and provides lawn mowing, landscaping, and leaf removal services. Twin Lakes also performs snow removal services to generate sales during the slower winter months.
New product offering
Starting in 2019, Twin Lakes will offer roofing repair services, including shingle installation, and gutter repair and replacement. Joe is frequently asked about these services and has referred the work to other companies that he recommends. As a result, he sees an opportunity to drive new business to this new service.
Prior to starting Twin Lakes, Joe worked in the roofing business, and he has several crew members who have performed roofing work for other companies.
Adding to the budget
Joe creates a formal budget for Twin Lakes each year, and the 2019 budget includes these sales and expense estimates for the roofing business:
Roofing Repair Services: 2019 Budget
This is a table
Gross profit is defined as sales, less cost of sales. The cost of sales balance includes those expenses that can be directly traced to the roofing service, including material and labour costs.
The roofing business will also incur operating costs that are not directly tied to roofing repair, including insurance premiums, mileage, and depreciation expense. Keep in mind that these operating costs are additional costs incurred by Twin Lakes. The insurance premiums, for example, are insurance costs for workers compensation and liability insurance specifically for the roofing business.
Joe budgets for $27,500 net income in 2019, based on $100,000 in sales. The budget also assumes that Twin Lakes will spend $60,000 to purchase a new truck, ladders, equipment, and tools for the roofing business.
Key factors to consider
As a business owner, you need to consider the total impact of launching a new product or service. Any new activity will have some level of impact on other areas of your company.
Joe discusses his roofing repair plans with several business mentors, to ensure that he covers all of his bases. Here are some additional factors that Joe must think about:
- Capital required: How will Joe pay for the $60,000 in new assets? If Twin Lakes has accumulated cash from prior year earnings, the firm may be able to pay cash for the truck and the other items. If cash isn’t available, Twin Lakes may have to borrow money and incur interest expense on a loan.
- Sunk costs: Sunk costs, or past costs, are fixed costs that cannot be eliminated in the short term. If Joe starts the roofing repair business and then decides to stop offering the service, he’s stuck with the $60,000 investment in assets. Sure, he may be able to use the truck, ladders, and other equipment for tree services or landscaping work, but some assets may need to be sold- possibly at a loss.
- Existing resources: Twin Lake’s existing staff will handle marketing, billing, and payroll processing for the roofing repair business. Does his current staff have the time to make that happen? Joe needs to understand how his staff uses their time and the impact that the new product offering will have on existing business operations. Ultimately, Joe may need to add staff, which reduces profitability on roofing repairs.
Launching a new product impacts your entire business, and you need to assess the impact and decide if your assumptions are reasonable.
Better than expected
If the roofing repair business turns out to be more successful than planned, Joe has some new decisions to make. Assume that, by June of 2019, the roofing repair business is on pace to generate $150,000 in annual sales, vs. the $100,000 budget. Based on demand for the service, Joe is able to price his product higher than planned, and he can produce a higher profit margin on each sale.
Profit margin is defined as (net income/sales), and this ratio allows Joe to compute the profit earned on each dollar of sales. This metric is a great tool to compare the profitability of different products, with different sales prices.
Given the higher level of sales and increased profitability, Joe might consider borrowing funds to add staff and support more roofing business. If the interest cost on the debt is lower than the profit margin of roofing repairs, total company profit will increase.
It’s a nice problem to have, but Joe needs to think carefully about this decision.
Diversify and reduce risk
Launching a new product helps you diversify your business, and reduce your dependence on one or two products or services. Twin Lakes, for example, may see an increase in roofing repairs during the winter months, when lawn care and landscaping work slows down. Smart business owners consider new lines of business but take a hard look at the financial impact before they jump in. With proper planning, your new venture can pay off.
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