In your business planning, have you ever asked: How much do I have to sell to reach my profit goal? How will a change in my fixed costs (rent, for example) affect my net income? How much do my sales need to increase in order to cover a planned increase in advertising costs? What price should I charge to cover my costs and allow for a planned amount of profit?
These are some of the questions that you can easily answer by using simple break-even analysis. In this guide, you will learn what break-even analysis is; see examples of how the technique works in manufacturing, retailing, and service businesses; and find out how to use it in your own business planning. Break-even analysis is a very useful tool because it can help you understand the sources of profit in your business.
Basic DefinitionsBreak-even analysis is the use of a simple. mathematical formula to determine the sales level at which the business neither incurs a loss nor makes a profit. The break-even point, in mathematical terms, is simply the point where:
Total Expenses = Net Sales Revenue
The amount of sales revenue should be readily available on your income statement as net sales. Net sales revenue is all sales revenue (often called "Gross Revenue") less any returns and allowances. If your business is brand new and you have no income statement yet, you will need to use a projected sales figure. This will work for any of the calculations outlined in this guide. Total expenses also appears on your income statement (or projections). You will find most expenses listed under the heading "Operating Expenses" or "General and Administrative Expenses." Additional expenses to include in your analysis are found on the line labeled "Cost of Goods Sold," which appears on income statements for retailers and manufacturers.
Sunday, November 26, 2006
Saturday, November 25, 2006
BUSINESS FEASIBILITY
Develop Your Sales ForecastIn evaluating how much of the market you can get, concentrate on why customers will buy from you and not your competition. You must offer the customer a good reason to switch to your business.
Data on selected industry sales is included in "Sales and Marketing Management's Survey of Buying Power" (in Reference List at the end of this document). Information is given by state, county, and metropolitan areas. This publication is updated annually.
Consult the Census of Retail Trade, Census of Wholesale Trade, Census of Manufacturing, and Census of Service Industriesfor industry data on sales receipts and value of shipments. This data is presented on a statewide and, sometimes, county-wide basis.
An excellent predictor of sales volume for a storefront operation can be obtained from Dollars and Cents of Shopping Centers (See Reference List). Another great source is Both references provide data on median sales per square foot and median size of location. Multiply the sales figure by your potential location's square footage to arrive at an estimated annual sales volume. You should also compare your potential location's size to the median to determine if your site's size is in line with the industry. This data is very useful even if your location is not in a shopping center. Remember: During the first year of business, it is unlikely that you will reach average sales levels, so be conservative.
Another valuable source of information on what level of business to expect is other business owners and owners of similar businesses that failed. Don't expect competitors to share this data with you. Owners of similar businesses outside your market area may, however, since you will not be in competition with them. Contact business owners in similar-size markets outside your area. You may be able to obtain valuable information and advice, based on their experiences.
Answer the following questions about your possible sales volume.
What price(s) will I charge for my products/services? Why?How many "units" of my products/services will I sell each month? Will monthly sales be fairly even or fluctuate because of seasonal factors?What will my total sales revenue be for the first year? (Total units multiplied by your selling price).What are the total sales for my type of product/service in the industry or market area (whichever applies)?Of the estimated total sales in my industry or market area, what amount can I expect to get for my business?Why will customers buy from me and not from my competitors? Will customers know or care that I'm offering something with a difference?What will my competition do in response?Does my estimate of sales seem reasonable based on the sales volumes of my competitors?When will my sales increase and slow down, and why? What steps can I take to minimize the peaks and valleys that occur during my sales year?Identify Your Start-up ExpensesYou will incur many costs to open your business. Some of these expenses will be of a continuing nature, such as rent, utilities, and insurance; others will be non-recurring (one-time) expenses, such as equipment purchases, security deposits, and the like. Create a VERY DETAILED, itemized list of startup costs.
Data on selected industry sales is included in "Sales and Marketing Management's Survey of Buying Power" (in Reference List at the end of this document). Information is given by state, county, and metropolitan areas. This publication is updated annually.
Consult the Census of Retail Trade, Census of Wholesale Trade, Census of Manufacturing, and Census of Service Industriesfor industry data on sales receipts and value of shipments. This data is presented on a statewide and, sometimes, county-wide basis.
An excellent predictor of sales volume for a storefront operation can be obtained from Dollars and Cents of Shopping Centers (See Reference List). Another great source is Both references provide data on median sales per square foot and median size of location. Multiply the sales figure by your potential location's square footage to arrive at an estimated annual sales volume. You should also compare your potential location's size to the median to determine if your site's size is in line with the industry. This data is very useful even if your location is not in a shopping center. Remember: During the first year of business, it is unlikely that you will reach average sales levels, so be conservative.
Another valuable source of information on what level of business to expect is other business owners and owners of similar businesses that failed. Don't expect competitors to share this data with you. Owners of similar businesses outside your market area may, however, since you will not be in competition with them. Contact business owners in similar-size markets outside your area. You may be able to obtain valuable information and advice, based on their experiences.
Answer the following questions about your possible sales volume.
What price(s) will I charge for my products/services? Why?How many "units" of my products/services will I sell each month? Will monthly sales be fairly even or fluctuate because of seasonal factors?What will my total sales revenue be for the first year? (Total units multiplied by your selling price).What are the total sales for my type of product/service in the industry or market area (whichever applies)?Of the estimated total sales in my industry or market area, what amount can I expect to get for my business?Why will customers buy from me and not from my competitors? Will customers know or care that I'm offering something with a difference?What will my competition do in response?Does my estimate of sales seem reasonable based on the sales volumes of my competitors?When will my sales increase and slow down, and why? What steps can I take to minimize the peaks and valleys that occur during my sales year?Identify Your Start-up ExpensesYou will incur many costs to open your business. Some of these expenses will be of a continuing nature, such as rent, utilities, and insurance; others will be non-recurring (one-time) expenses, such as equipment purchases, security deposits, and the like. Create a VERY DETAILED, itemized list of startup costs.
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