“I want my business to make six figures.”

Okay.

Why?

I hear some version of this all the time. $100,000 has somehow become the official number at which the Department of Entrepreneurship sends you a certificate confirming that you have made it.

But $100,000 in revenue tells me very little about whether a business is actually worth starting.

A consultant with $100,000 in revenue and $15,000 in expenses has a very different business from a retailer with $100,000 in revenue and $70,000 tied up in inventory, shipping, transaction fees, and other costs.

There is also a more basic question that gets skipped when people start dreaming about revenue:

How much money does this business actually need to produce for you?

That number gives us somewhere useful to start.

Most aspiring founders go in the opposite direction. They pick a business idea, come up with a price, start building things, and eventually hope enough customers appear to make the economics work.

I would rather do some math first.

And I say that knowing full well that putting math in a newsletter is a terrific way to make people suddenly remember they have other emails to read.

Stick with me.

Start with the income you need, then work backward until you can see what the business actually requires.

Step 1: Determine what you need from the business

Forget the generic six-figure goal for a minute.

Think about your actual life.

Suppose you eventually want the business to provide $60,000 per year in income.

That is $5,000 per month.

Your number could be much smaller. Maybe this is a side business and an extra $1,500 per month would make it worthwhile. Maybe you want it to replace an $80,000 salary.

The point is to choose a number connected to something real.

And remember, we are talking about what the business needs to produce for you, not simply how much money customers pay the business.

That distinction matters.

Step 2: Figure out how much each sale actually contributes

Let’s say you are considering a business where the average customer pays you $500.

It is tempting to divide $60,000 by $500 and conclude that you need 120 customers.

That math ignores the cost of making those sales.

Suppose each $500 sale has about $250 in variable costs. Those could include materials, subcontractors, shipping, credit card fees, commissions, or other costs that increase when you make another sale.

That leaves $250 from each sale to cover the rest of the business and ultimately pay you.

Accountants call this contribution margin.

Sale price: $500
Variable costs: $250
Contribution margin: $250

Now let’s assume the business will also have $12,000 per year in fixed expenses such as software, insurance, licenses, professional fees, equipment, and marketing.

If you want $60,000 for yourself, the business needs to generate roughly $72,000 in annual contribution margin before considering taxes.

At $250 per sale:

$72,000 ÷ $250 = 288 sales per year

That comes to:

24 sales per month

Now we have something useful.

Step 3: Work backward from sales to prospects

Twenty-four sales per month still does not tell us whether this business is realistic.

We need to know how many potential customers it takes to produce those sales.

Suppose about 20% of the qualified prospects you speak with eventually buy.

To get 24 customers:

24 ÷ 20% = 120 qualified prospects per month

That is roughly 30 per week.

Now your business idea has to answer a much more interesting question.

Can you realistically find and reach 30 qualified potential customers every week?

Think about what that would require.

Where are these people? How will they discover you? Will you contact them directly? Will they come through referrals? Search? Social media? Paid advertising? Partnerships? Foot traffic?

And if 30 qualified prospects per week sounds completely unrealistic, that does not automatically kill the business idea.

You have variables you can change.

A higher price could reduce the number of customers you need. Lower variable costs could improve your contribution margin. A better sales process could improve your conversion rate. Recurring purchases could increase the value of each customer. A different target market might be easier to reach.

You can start playing with the model before spending thousands of dollars launching the business.

The math exposes the business hiding inside the idea

This is where I think a lot of entrepreneurship advice gets things backward.

People spend enormous amounts of time asking whether an idea is “good.”

Good according to what?

A business selling a $20 product with a $5 contribution margin might need thousands of transactions to produce the income you want. A specialized service charging $3,000 with relatively low variable costs might only need a few dozen clients per year.

Both could work.

But they require completely different customer acquisition systems, time commitments, capital, and skills.

That is why I want you to calculate your number early.

You are creating a rough economic model of the business.

And yes, your assumptions will be wrong.

You have never operated the business before. Of course they will be wrong.

The goal at this stage is to figure out which assumptions have to be true for the business to make sense.

If your idea requires 1,000 customers per month, but you have no reasonable explanation for how you would reach 1,000 potential buyers, you have discovered something important.

Better to discover it with a calculator than after buying 4,000 custom boxes with your logo printed on them.

Weekend Exercise

Take one business idea you are considering and work backward.

Start with the amount of annual income you would eventually want the business to provide you.

Then make your best estimate for:

1. Desired annual owner income: $__________

2. Estimated annual fixed business expenses: $__________

3. Average sale price: $__________

4. Variable cost per sale: $__________

5. Contribution margin per sale: $__________

Sale price minus variable costs.

6. Sales needed per year: __________

Add your desired income and fixed expenses, then divide that amount by your contribution margin.