(This is the second in a two part post.  You should probably start at part one which contains a framework for thought.  Part two contains recommendations and my philosophy for first-time entrepreneurship).

The most basic principle of business is that profit is revenue minus costs.  Try considering all fixed costs as a rate — especially a daily or hourly rate — and then look around you.  You’ll find you have more insight into existing businesses or the potential of new ventures to succeed. 

And you’ll find that some business ideas simply don’t make sense.

Don’t plan on building a business by selling a product for $2 that takes an hour of time to produce unless you’re superhuman and don’t need sleep.

Don’t franchise a mobile RV arcade for “between $89,000 and $200,000″ a year which can fetch “$300 to $350 for a two-hour party appearance” without carefully considering the math — that you’ll need to book somewhere between 250 to 650 clients just to break even on your initial upfront investment.  I don’t know too many kids who have birthday parties on Monday nights..and there’s only so many hours in a weekend and only 52 weekends in a year.  You’re might be paying off these costs for eternity…and the high tech games will certainly have become stale by then.

And please don’t build an SMS mobile coupon company on an assumption that you’ll get a salesperson to hit up every local business selling your $10 service (so cheap that nobody will say no!).  As mentioned in my article about SMS coupons, an entry level salesperson earning $50,000 a year is a cost of $1000 a week or $200 a day or $25 an hour.  Make sure a sales person would earn more than they would cost.  If the numbers don’t work, your business won’t work.

But wait!  It’s not all gloom and doom. Thinking in terms of daily sales can actually be really inspiring for a first time entrepreneur:

If you’re quitting a job to start your own company, consider what it will take in daily earnings to replace your salary.  Better yet, consider how much you honestly need to be ramen profitable.

Most recent college graduates in NYC working a full time job are probably earning somewhere between $35,000 – $80,000 depending on industry and skill set.  Consider that $100/day for 365 days is $36,500 annually.  This is a livable wage for most scrappy 20-somethings (assuming you don’t have a family to support and you’re not drowning in school debt).  Consider that $200/day is a rather comfortable annual salary of $73,000.  (And yes, these numbers are based on working 7 days a week.  And they don’t take into account the unpaid time you’ll put into an initial product launch.)

If you need inspiration to get started, never forget just how ’small’ a start can be: just get to $100 a day.  Consider it milestone number one for your first entrepreneurial venture.  Let’s say you have a product idea that you think would sell for $20 with a 50% margin.  Ask yourself: “Can I sell 10 per day?”  Consider that again: 10 per day.  Consider that there’s six billion people in the world,  is it really so hard to find 10 customers each day?  Or if you’re working with a partner, 20 customers?

So consider David Heinemeier Hansson’s amazing advice (that I have echoed above) and stop thinking about your next billion dollar startup.  I believe first time entrepreneurs (of which I am one myself) should start small.  Go for the lowest bar of success: the $100/day idea.  Once you’ve conquered that, go for the $100,000 idea, then the million dollar idea, then the billion dollar idea.  Along the way you’ll meet fantastic people, gain skills and confidence, and maybe even have some fun.

Now if only my 2c could be put towards rent…