Friends, when you have what you think is a good idea, the first step is to analyze whether your business will succeed. The first financial tool you should use is a break-even analysis. A break-even analysis will calculate what your revenues must be for your business to produce a profit.
The key to using this tool is to be realistic in your expected revenues and conservative (high) in your expected costs. The break-even analysis will force you to do the research that will allow you to know whether you should pursue your business idea further.
You will need to do a break-even analysis for your business plan anyway, but its a good idea to do it now to determine whether it is even realistic to pursue your business idea and whether it is worth writing a complete business plan.
Revenues above the break-even point result in profits whereas revenues below the break-even point result in losses. You can do a break-even analysis whether you are selling a product or a service. If you have a rough idea of what your expected revenues will be, you can tell after doing a break even analysis whether you can expect a profitable business. If not, you either have to make some changes or give up your business idea. It is crucial to understand some basic concepts before doing a break-even analysis.
Sales revenue 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 on how much you need to make a good profit.
Fixed costs (sometimes called "overhead") don't vary much from month to month. They include rent, insurance, utilities, and other set expenses. It's a good idea to add a cushion to your projected fixed costs because there will always be miscellaneous expenses that you can't predict.
Variable costs are expenses that change in proportion to the activity of a business. Variable costs vary with the number of units produced. Variable costs are made up of direct costs which are costs that are attributable to preparing each unit for sale, and indirect costs like certain overhead which can vary with the number of units prepared for sale. Together, variable costs and fixed costs make up the two components of total cost.
The break-even point for a product is the number of units you need to sell for total revenue received to equal the total costs, both fixed and variable.
The key to using this tool is to be realistic in your expected revenues and conservative (high) in your expected costs. The break-even analysis will force you to do the research that will allow you to know whether you should pursue your business idea further.
You will need to do a break-even analysis for your business plan anyway, but its a good idea to do it now to determine whether it is even realistic to pursue your business idea and whether it is worth writing a complete business plan.
Revenues above the break-even point result in profits whereas revenues below the break-even point result in losses. You can do a break-even analysis whether you are selling a product or a service. If you have a rough idea of what your expected revenues will be, you can tell after doing a break even analysis whether you can expect a profitable business. If not, you either have to make some changes or give up your business idea. It is crucial to understand some basic concepts before doing a break-even analysis.
Sales revenue 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 on how much you need to make a good profit.
Fixed costs (sometimes called "overhead") don't vary much from month to month. They include rent, insurance, utilities, and other set expenses. It's a good idea to add a cushion to your projected fixed costs because there will always be miscellaneous expenses that you can't predict.
Variable costs are expenses that change in proportion to the activity of a business. Variable costs vary with the number of units produced. Variable costs are made up of direct costs which are costs that are attributable to preparing each unit for sale, and indirect costs like certain overhead which can vary with the number of units prepared for sale. Together, variable costs and fixed costs make up the two components of total cost.
The break-even point for a product is the number of units you need to sell for total revenue received to equal the total costs, both fixed and variable.