soffit installation crane siding south barrington concrete siding james hardie siding james hardie siding schaumburg .. Chicago Drug testing

Break-Even Analysis

A significant advantage of some business ideas is that the venture can break even at what seems to be an easily achievable volume. A technique for quantifying that volume, called break-even analysis, examines the interaction among fixed costs, variable costs, prices, and unit volume to determine that combination of elements in which revenues and total costs are equal.

Fixed costs are those expenses necessary to keep the business open, and are not impacted by sales volume. They will include such things as rent, basic telephone expenses and utilities, wages for core employees, loan or lease payments, and other necessary expenditures. An entrepreneur should also include a living wage for himself/herself as a fixed cost.

Variable costs include those expenses that change as a result of sales volume. This can be a relatively simple relationship, as in cost of goods sold, where for example the variable cost of baked goods sold at a coffee shop is what we pay the baker for them, $0.30 each. Variable costs can also be very complex; for example, higher sales in one area of our business may increase long distance charges. Labor costs may be fixed for full-time employees, then, as sales increase, some overtime is incurred until additional personnel can be justified.

Generally, an initial break-even analysis focuses on a relatively narrow range of sales volume in which variable costs are simple to calculate. The variable cost in a coffee shop is simply the cost of goods sold. For a pizza delivery operation, it might be the cost of ingredients, and some cost allocated for operation of the delivery vehicle. A general term often used for the difference between selling price and variable cost is "contribution margin," or the amount that the unit sale contributes to the margin available to pay fixed costs, and generate profit (we hope).

Now let's take a look at how break-even analysis can be helpful to us. For this example, let's assume we have determined that the level of fixed costs (salaries, rent, utilities) necessary to run a coffee shop on a monthly basis is $9,000. In addition, a cup of coffee that we sell for $1 costs us $0.25 for the bulk coffee, filters, and water.

The contribution margin of a cup of coffee is, therefore, $0.75. We can now calculate how many cups of coffee we have to sell to cover our fixed costs:

Break-Even = (Fixed Costs) / (Contribution Margin)

= $9,000/$0.75 = 12,000 cups of coffee per month

Let us say, further, that the fixed cost estimate was based on being open 6 days a week, 8 hours a day. This converts roughly to 200 hours a month, so we have to sell 60 cups an hour. This is a cup a minute for every minute we are open.

Does this seem feasible? Let us assume not, and evaluate some options.

(1) Cut expenses

Remember that we are still in the planning stage here, and experience has shown that prospective entrepreneurs almost always underestimate expenses. Let's pass on this approach.

(2) Raise prices

We could plan on charging $1.25 per cup from the beginning, for a contribution margin of $1 per cup. The arithmetic is easy; to cover $9,000 in fixed expenses we need to sell 9,000 cups of coffee per month. The most important factor here is what the competition is charging.

(3) Broaden our product line

For the sake of clarity in demonstrating relationships between price, cost, and sales volume, we have considered a simplified version of how a real coffee shop might operate. The market severely constrains the amount we can charge for an ordinary cup of coffee, and a one product shop would have limited appeal. Perhaps we could also offer gourmet coffees, which cost us $0.50 per cup to brew, at $2.00 per cup. We could also offer baked goods, which cost us $0.30 each, at $1.30.

Suffice it to say that the break-even calculation now becomes a bit more complex, and outside what we are trying to accomplish here. Feel free to try it on your own.

This has been a very brief overview of how break-even analysis can be used in helping the entrepreneur better understand the relationship of the financial factors involved in measuring the feasibility of a proposed venture. From a preliminary analysis of selling prices that the market will bear, prevailing costs, and reasonable expectations of sales volumes, the entrepreneur can avoid making serious mistakes and may discover significant opportunities.

John B. Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com, and maintains business and political blogs.

In The News:

More Uses for Your Business Plan

You have invested a lot of time and energy on... Read More

Offense: Beat the Odds

When in doubt, cut that out! Yeah, yea, doubting Thomas... Read More

Becoming Wise - Wild & Free - Writing A Successful Business Plan - Part 2 - Do It In Steps

So you've decided to write your own business plan because... Read More

Breaking the Growth Barriers in the Information Technology and Software Sector

There's nothing automatic about corporate growth, particularly in the information... Read More

Are You Ready To Go International?

Although North Americans were the dominant population on the Internet,... Read More

If You Dont Focus, Innovate and Evolve, You Die

After 128 years of business, a household word, Montgomery Wards,... Read More

The Accountability/Alignment Process: Three Steps to an Accountable Organization

The Accountability/Alignment Process: Three Steps to an Accountable Organization Generating... Read More

Sales Planning and Business Plans

Writing a business plan can be tricky when all the... Read More

Under Construction During the Storm ? A Hurricane Guide for Businesses that are Under Construction

As a business owner, you've likely created a hurricane plan... Read More

Designing an Efficient Distribution System

Let us look at a few of the big distribution... Read More

Business Disaster? Wont Happen to Me

As fast as you can say business disaster, your business... Read More

Why Six Sigma Will Work in Healthcare

If ever there were an industry where we want zero... Read More

Laying It Out On Paper

You might be thinking to yourself, "Why should I waste... Read More

Mastermind Your Way to Success

What do Mark Victor Hansen, Robert Allen, Anthony Robbins, Andrew... Read More

Urban Flight in Ohio

Many of Ohio's downtown areas are in need of upgrading... Read More

Rules to Setting Business Goals and Objectives: Why and How to be SMART

We all know that nothing runs without a plan, and... Read More

Could You Be Setting Your Business Plan Up For Failure?

David E. Gumpert, author of Burn Your Business Plan, often... Read More

Microsoft Great Plains in Agriculture ? implementation highlights

In this small article we'll concentrate on farmers associations and... Read More

Vision Getting Dim?

A recent conversation started with a typical question, "How's business?"... Read More

6 Changes You Can Make to Increase Business Profits

I read once that something like 30 percent of all... Read More

To Go or No Go, That Is The Question

Last week we talked about a few of the ways... Read More

25 Ways To Find Companies To Buy

When you start your program to purchase your "ideal" company,... Read More

Business Plans Keep You On The Success Course

Where would your business be without a proper plan? A... Read More

Financing Business Expansion for Your Small Company

How you finance the expansion of your business is important.... Read More

How to Start A Business Plan

A business plan precisely defines your business, identifies your goals,... Read More

fluorescent high bay garage led lights Pete's produce ..
fluorescent high bay garage led lights Pete's produce ..