Will My Business Make Money

How Can You Tell if Your Business Idea Will be Profitable?

1) You should research the financial soundness of your idea.

2) Prepare a “Break-even Analysis” (determine your break-even point) to get an idea of whether your business will succeed.

What a Break-even Analysis Tells You

• A break-even analysis shows you the amount of revenue you will need to bring in to cover your expenses, before you make even a dime of profit.

• If you can attain an surpass your break-even point – that is, if you can easily bring in more than the amount of sales revenue you will need to meet your expenses – then your business stands a good change of making money.

What a Break-even Analysis Tells You (cont.)

• Many experienced entrepreneurs uses a break-even analysis as a primary screening tool for new business ventures.

How to Prepare a Break-even Analysis?

• To perform a break-even analysis, you’ll have to make educated guesses about your expenses and revenues.

• You should do some serious research – including an analysis of your market – to determine your projected sales volume and your anticipated expenses.

You Will Need to Make the Following Calculations:

1) Fixed Costs2) Sales Revenue3) Average Gross Profit for each sales4) Average Gross Profit Percentage

Fixed Costs

• Fixed Costs (sometimes called overhead) don’t vary much month to month.

• They include: rent, insurance, utilities, and other set expenses. It’s also a good idea to throw a little extra, say 10%, into your break-even analysis to cover miscellaneous expense that you can’t predict.

Sales Revenue

• This is the total dollars from sales activity that you bring into your business each month or year. To perform a valid break-even analysis, you must base your forecast on the volume of business you really expect – not how much you need to make a good profit.

Average Gross Profit for Each Sale

1) Average gross profit is the money left over from each sales dollar after paying the direct costs of a sale. (direct costs are what you pay to provide your product or service)

2) For example: if Jane Smith pays an average of $100 for goods to make dresses that she sells for an average of $300,

3) Her average gross profit is $200.

Average Gross Profit Percentage

1) This percentage tells you how much each dollars of sales income is gross profit. To calculate your Average Gross Profit Percentage, divide your average gross profit figure by the average selling price.

2) For example: if Jane Smith makes and average gross profit of $200 on dresses that she sells for an average of $300, her Gross Profit Percentage is 66.7% ($200 divided by $300)

Calculating Your Break-even Point

1) Once you have calculated the Fixed Costs, Sales, Revenue, Average Gross Profit for Each Sale, and Average Gross Profit Percentage, it’s easy to figure out your Break-even Point.

2) Simply divide your estimated fixed costs by your gross profit percentage to determine the amount of sales revenue you will need to bring in just to break even.

Calculating Your Break-even Point (cont.)

3) For Example: if Jane Smith’s Fixed Costs are $6000 per month, and her expected profit margin is 66.7%, her break-even point is $9000 in sales revenue per month ($6000 divided by 0.667).

4) In other words, Jane Smith must make $9000 per month just to pay her fixed costs and her direct (product) costs.

5) Note that this does not include any profit, or even a salary for Jane Smith

If You Can’t Break Even

1) If your break-even point is higher than your expected revenues, you’ll need to decide whether certain aspects of your plan can be changed to create an achievable break-even point. For Example:

2) Find a less expensive source of supplies3) Do without an employee4) Save rent by working out of your home5) Sell your product or service at a higher price

If You Can’t Break Even (cont.)

6) If you tinker with the numbers and your break-even sales revenue still seems like an unattainable number, you may need to scrap your business idea.

7) If that’s that case, take heart in the fact that you found out before you invested your (or someone else’s) money in the idea.

Addition Financial Projections

The following are additional financial projections that should also be part of your business plan, to round out your business’s financial picture.a)A Profit-and-loss forecastb)A Cash Flow Projectionc)A Start-up Cost Estimate

Profit-and-loss Forecast

• This is a month-by-month projection of your business’s net profit from operations

Cash Flow Projection

• This shows you how much actual cash you will have, month-by-month; to meet your expense.

Start-Up Cost Estimate

• This is the total of all the expenses you will incur before your business opens.

Don’t Forego a Break-Even Analysis

1) Although creating a break-even forecast might sound complicated, you owe it to yourself to prepare one as one of the first steps in your business planning process.

2) Now is the time to get used to using cost estimates and profit margins, if you are going to succeed in business.

3) As you can see, a realistically prepared break-even forecast will tell you whether your idea is a sure winner, a sure loser, or like most ideas, needs modifications to make it work.