Break-Even prognosis

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

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

12 OUNCES EQUALS HOW MANY CUPS

Variable costs comprise those expenses that change as a succeed of sales volume. This can be a relatively easy relationship, as in cost of goods sold, where for example the changeable cost of baked goods sold at a coffee shop is what we pay the baker for them,

Generally, an preliminary break-even determination focuses on a relatively narrow range of sales volume in which changeable costs are easy to calculate. The changeable cost in a coffee shop is plainly the cost of goods sold. For a pizza delivery operation, it might be the cost of ingredients, and some cost allocated for doing of the delivery vehicle. A normal term often used for the distinction between selling price and changeable cost is "contribution margin," or the number that the unit sale contributes to the margin ready to pay fixed costs, and originate behalf (we hope).

Now let's take a look at how break-even determination can be helpful to us. For this example, let's assume we have carefully that the level of fixed costs (salaries, rent, utilities) significant to run a coffee shop on a monthly basis is ,000. In addition, a cup of coffee that we sell for costs us .25 for the bulk coffee, filters, and water.

The offering margin of a cup of coffee is, therefore, .75. We can now presuppose how many cups of coffee we have to sell to cover our fixed costs:

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

= ,000/.75 = 12,000 cups of coffee per month

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

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

(1) Cut expenses

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

(2) Raise prices

We could plan on charging .25 per cup from the beginning, for a offering margin of per cup. The arithmetic is easy; to cover ,000 in fixed expenses we need to sell 9,000 cups of coffee per month. The most prominent factor here is what the competition is charging.

(3) Broaden our goods line

For the sake of clarity in demonstrating relationships between price, cost, and sales volume, we have carefully a simplified version of how a real coffee shop might operate. The shop severely constrains the number we can payment for an commonplace cup of coffee, and a one goods shop would have puny appeal. Possibly we could also offer connoisseur coffees, which cost us .50 per cup to brew, at .00 per cup. We could also offer baked goods, which cost us .30 each, at .30.

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

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

.30 each. changeable costs can also be very complex; for example, higher sales in one area of our company may increase long length charges. Labor costs may be fixed for full-time employees, then, as sales increase, some overtime is incurred until added personnel can be justified.

Break-Even prognosis

12 OUNCES EQUALS HOW MANY CUPS