How to Understand Business Fundamentals and Profit Margins Before You Start

Many of us dream of starting a business and becoming our own boss. Some pursue entrepreneurship by choice, while others are forced into it due to retrenchment, job dissatisfaction, or economic shifts. With increasing competition and wages being pushed down, business profitability can be hard to achieve. Others, without savings or financial support, turn to gig work like driving for Grab. I did it once, and I can say that driving all day is mentally and physically exhausting. If you are reading this, please be kind to those who drive for a living.

Most new business owners rely on past experience or personal interests when launching their ventures. While passion and expertise are crucial, many lack financial planning for entrepreneurs or fail to recognize that business fundamentals go beyond having a good idea. Expansion and spending sprees during good times often lead to financial instability when the economy turns. Without proper breakeven analysis, businesses struggle to survive.

Case Study: Eddie’s Restaurant – A Lesson from JieRise’s Ebook

Eddie’s restaurant case study comes from JieRise’s ebook on business profitability and financial recovery. His story illustrates why businesses fail despite strong customer flow and quality service. Eddie’s restaurant had the right ingredients for success, including a strategic location, peak-hour crowds, and excellent food. Yet, a critical flaw in its financial structure doomed the business. High rent in a small space limited revenue potential, and no matter how many tables were squeezed in, daily sales volume was capped, restricting growth.

His downfall wasn’t a lack of customers. It was poor financial planning for entrepreneurs and a failure to calculate realistic profit margins and breakeven analysis.

The Importance of Profit Margins in Business Fundamentals

Before starting a business, one of the first financial metrics to understand is profit margin, which measures the percentage of revenue left after deducting direct costs such as materials, ingredients, or production expenses.

How to Calculate Profit Margin

Profit Margin (%) = (Selling Price - Variable Cost) / Selling Price × 100

If Eddie’s restaurant sells meals at $25 per dish and the cost per meal is $10, the profit per meal is: $25 - $10 = $15

Profit Margin = (15 / 25) × 100 = 60%

While a 60% profit margin seems healthy for the food industry, high fixed costs such as rent and salaries reduce overall profitability. This is why understanding business fundamentals and breakeven analysis is crucial.

Fixed Costs Breakdown

To determine how much Eddie’s restaurant needed to generate in revenue, we must first understand his fixed costs.

Rent: $12,000 Utilities and Maintenance: $3,000 Salaries: $27,100

• Eddie (Head Chef): $6,000

• Assistant Chefs (2): $9,000

• Service Crew (2): $5,600

• Public Relations and Marketing: $3,000

• Finance and Admin: $3,500 Marketing and Miscellaneous: $2,000

Total Fixed Costs: $44,100 per month

These expenses must be covered before making a profit, making breakeven analysis essential for business profitability.

Breakeven Sales Calculation

To determine how much Eddie needs to sell per month to breakeven, we use the formula:

Breakeven Revenue = Fixed Costs ÷ Profit Margin

$44,100 ÷ 60% = $73,500 per month

This means before making any profit, Eddie must generate $73,500 in revenue each month to cover fixed costs.

Profit Calculation for $5,000 Monthly Earnings

To earn $5,000 in profit per month, Eddie must increase his revenue beyond breakeven.

Target revenue = Fixed Costs + Desired Profit

$44,100 + $5,000 = $49,100 ÷ 60% = $81,833 revenue per month

If you are starting a business, do you think you can generate this amount in sales daily? If yes, you are on the right track for business profitability. If not, what can you do to increase sales? Should you offer promotions, expand your menu, reduce costs, or improve customer retention?

If you are still looking for a location, securing a space with lower rent could be a better option before committing to long-term expenses.

Eddie’s Restaurant Capacity and Sales Projection

Let’s revisit Eddie’s business fundamentals and assess whether his numbers were achievable.

Eddie’s restaurant could barely fit 15 tables. Assuming he manages a two-time turnaround for both lunch and dinner:

15 tables × 2 turnovers at lunch + 15 tables × 2 turnovers at dinner = 60 meals per day

60 meals × $25 × 30 days = $45,000

Even if he successfully upsells side dishes and alcohol, he would still need an additional $28,000 in sales from those items to reach his target revenue.

This assumes full capacity operation every day. In reality, restaurants rarely run at full capacity for both lunch and dinner daily. The chances of consistent full occupancy are close to zero, making business profitability volatile.

Breakeven Time for a $200,000 Investment

Now let's take a look at the financial planning for entrepreneurs who invest a significant amount upfront. If Eddie invested $200,000, how long would it take to recover the amount? Assuming he manages to make a consistent monthly revenue of $81,333:

Breakeven time (months) = Investment ÷ Monthly Profit

$200,000 ÷ $5,000 ≈ 40 months (3 years, 4 months)

If revenue drops or expenses increase, Eddie may take even longer to recover his investment.

Key Business Lessons from Eddie’s Case Study

Profit margin defines business fundamentals, making it an essential metric to calculate before starting a business. Breakeven sales must be realistic because underestimating revenue needs leads to failure. Financial stability depends on consistency, not peak days, so financial planning for entrepreneurs should account for slow periods. Expenses should not exceed revenue potential, as high rent and other fixed costs can destroy business profitability. Understanding breakeven time before investing is key to avoiding blind spending without a clear recovery plan.

Eddie’s story, taken from JieRise’s ebook, highlights why businesses fail, not because of bad products, but due to poor financial planning for entrepreneurs. In Eddie’s case, he likely fluctuated around the breakeven point or even dipped below it without realizing. This may have led him to seek financing as a way to sustain operations. Businesses that hover near the breakeven mark often fall into a slow and deeper financial struggle.

Sometimes, these experiences are meant to be. Perhaps Eddie needed to go through this journey to learn hard lessons no business fundamentals course could teach him. Failure, while painful, often becomes the foundation for future success. What he learned from his first business could prepare him for a stronger, wiser second attempt.

By understanding breakeven analysis, profit margins, and financial planning for entrepreneurs before starting a business, entrepreneurs can increase their chances of running a profitable venture that thrives beyond economic shifts.

Disclaimer

All figures and calculations provided in this article are based on my own assumptions. No formal research or market analysis has been conducted to verify the costs or revenue projections. These numbers are purely for educational purposes and should not be used as financial advice or business planning without proper research and consultation.