Protoscopic

Before you start any venture you should do a realistic income projection. If you have already started your enterprise, you may want to do a projection based on additional income. If you have already fully executed your idea, you may simply want to know if it was worth having done. Whatever your goal, you are going to need to calculate your venture’s income.

First, you need to do a realistic assessment of what you are likely to make. Using best-case projections is a surefire way to be disappointed. Obviously these projections are going to be highly subjective—in fact, they may seem completely fabricated. But it’s a very worthwhile investment to see just how much advertising is necessary or how many thing-a-ma-jigs you would have to sell to make a certain amount. After you’ve played with the numbers a bit, make a realistic estimate of what might be likely; this is your projected revenue.

(If instead of projecting you’re just ‘doing the books’ for a project already in progress, you should already have these revenue numbers. You can use them to project further into the future and have more accurate assessments than if you’d just ‘made them up’ before starting.)

Second, deduct any expenses. These include:

• Direct Costs of Goods Sold (i.e., if you’re selling widgets that cost you $5 to make or buy, take out $5 for every widget you’re projecting you’ll sell)
• Hosting Costs
• Domain Name Registration Costs
• Purchased Labor (either outsourced or employed)
• Shipping Costs
• Advertising Costs

Additionally (and most importantly), you need to deduct the cost of your own labor. This is typically forgotten, but if the goal is to create a passive income stream, any work you have to dedicate to maintaining the enterprise needs to be deducted from your profits. This can often be a daunting number. Even if you only require 1 hour per week to maintain your site, that’s 52 hours per year. Multiplied by your hourly rate this can quickly bite into your profits.

The art of projecting income, AKA "making things up"

You should not include in this deduction the time spent developing your website. This is a one-time expense and doesn’t affect the ongoing profitability of your venture. That doesn’t mean that up-front investments are irrelevant. Obviously, establishing a passive income stream of $5000 per year is a much better deal with 50 hours of labor versus 500, but right now we’re just worried about operating costs. We’ll see if the up-front costs are worth it later.

Finally you will need to remove income tax from the projected profits. While the tax situation can become complicated, probably the most realistic way is to project paying the same tax rate on your income from this passive income stream that you would on ordinary income. Thus if you are in the 35% tax bracket, reduce your income stream by 35%.

After completing these calculations, you can figure out a rough estimate of what your project will yield in yearly income. Once you’ve finished your valuation, you will probably want to play with these numbers to find your break-even point. That is how much advertising or how many products will you have to sell just to “be in the black.” Later on we’ll use these calculations to deduce if it’s worth the effort to develop this project.