install vinyl siding buffalo grove siding types marengo painting aluminum siding crane siding soffit installation bannockburn .. 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

Business Plan: The Simplest Business Plan Ever

If you're a solo professional like I am, you know... Read More

Clearing the Path: 4 Ways Fear Wreaks Havoc on Your Dream and What to Do About It

Please take a moment before you read any further and... Read More

Sample Business Plan Outline

If you are looking for a partner, funding, angle investor... Read More

Why Create an Annual Plan?

Can you imagine going on a road trip without knowing... Read More

Shortening Product Life Cycle!

The current state of the available technology at the disposal... Read More

Are You Aware of Planning in Business?

Human beings are rational agents. Rationality endorses one to take... Read More

Ten Steps To A Great Strategic Plan

Ask a small business owner about their strategic plan and... Read More

What is a Shared Vision?

So what makes a vision successful? Everyday companies try to... Read More

What is Your MSP?

For many consumers and producers, MSP is an acronym for... Read More

College Students and Graduates to Run Company Outlets or Franchises

Does your overall business strategy include the recruitment of college... Read More

Business Plan Financial Projections: Stop Worrying About Being Right...

Business plan financial projections seem daunting because they are so... 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

The Impact of Price Popularity on Profits

The goal of almost every business owner is to generate... Read More

If You Dont Focus, Innovate and Evolve, You Die

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

SWOT Analysis Is No Magic 8 Ball

Q: A key investor in my business has suggested that... Read More

Defining Go for It Business Goals

Many business start-up kits or consultants will tell you one... Read More

Strategic Planning Consulting

Strategic planning and consulting is the strategy roadmap to manage... Read More

Three Easy Ways To Know Thy Competitor

"Did you hear what your competitor is doing?" This question... Read More

Don?t Just Talk About the Weather, Use It to Advantage

A well known, national chain of restaurants discovered that certain... Read More

Could You Be Setting Your Business Plan Up For Failure?

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

Describing Intellectual Property in Your Business Plan

Most companies that are worthy of raising venture capital have... Read More

Abstract Thought; Business Strategies and Biological Systems

To stop a computer virus you must understand how it... Read More

8 Ways to Earn More Without Working Harder

Conventional wisdom has it that there are only three ways... Read More

SWOT Analysis

If you've ever listened to Warren Buffett talk about investing,... Read More

outdoor led bulbs high bay led light Pete's produce ..
outdoor led bulbs high bay led light Pete's produce ..