One of the start-up business basics is determining break-even – the point where your sales supports your overhead. Beyond break-even lies profitability.
And while it is just one of many financial ratios we consider – it is a primary decision tool for anyone launching a new venture. It is the feasibility test.
“In order for the business to hit breakeven, we need to sell 10,000 widgets. Can we realistically expect to sell 10,000 widgets?”
For example –
I sell hotdogs. My cart, licensing, insurance and marketing run about $600 a month. My food costs per hotdog are $1 and I sell them for $3.
$600/$3-$1= 300 hot dogs a month to reach breakeven.
Further, if I break this down by the number of days I sell hotdogs – 5 days a week (20 days a month) then 300/20 = 15 hot dogs a day to hit break-even.
Most small businesses need to support the owner, so to figure how much I need to sell to make $1,000 a week I add that to the fixed costs. $1,000 a week for 4 weeks = $4,000.
$4,000 + $600/3-1 =2,300 hot dogs a month or 2,300/20 = 115 hot dogs a day. So as a perspective business owner, I need to figure out where I can have my cart to make sure I am selling 115 hot dogs a day.
Obviously, changing the pricing impacts the break-even analysis. If I raise the price of my hot dogs by $1 and assuming all else stays the same – my new break even is $4,600/4-1 = 1,533 hot dogs a month or just 76 hot dogs a day. Be careful though – raising your prices can impact your sales. If your customers feel $4 is too much, they’ll go buy somewhere else. Your pricing needs to be in line with what customers are willing to pay.