Business Start-Ups magazine, April 1999
PROBLEM: Your business plan is based on a profit of 8 percent and, after your first quarter in business, you discover you aren't even close. Worst of all, you aren't certain if you are including all the necessary variables.
SOLUTION: Perform a break-even analysis. This is a way of determining when your business has reached the break-even point. Only after you've done this can you get on the road to profitability. The formula you use depends on whether you sell a product or a service:
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If you sell a product:
1. Determine which items are your fixed costs. These cost the same regardless of your sales volume (rent, salaries, utilities, etc.).
2. Identify your variable costs. These are the ones incurred specifically to make and sell your product (materials, commissions, etc.).
3. Add items that are neither fixed nor variable (advertising, etc.).
4. Total these three categories.
5. Subtract your variable costs from your sales total to determine your contribution margin percentage. Your total fixed costs, divided by the contribution margin percentage, give you your sales break-even point, in dollars. To get your break-even point in products, divide the contribution margin by your total number of units produced. Then divide your total fixed costs by the contribution margin per unit.
If you sell a service:
1. Perform the first four steps.
2. Divide your total income by your total expenses. If your income exceeds your expenses, you are profitable.
Excerpted with permission from Roger Fritz's The Small Business Troubleshooter (Career Press, $16.99,1-800-CAREER-1).