Move Into the Profit Zone Good news: You've reached the breakeven point! That means you can start making some serious cash.
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(YoungBiz.com) - Here's something that may seem abit hard to fathom: as a new 'trep, you're actually goingto celebrate when your business reaches the zero profitmark. Sound crazy? It does until you realize that that is the pointwhen your business makes the transition from operating at a loss(the place where most businesses begin) to the place called thebreakeven point--and on to the profit zone.
Of course, the breakeven point--the point when your salesexactly cover your monthly expenses--is different for everybusiness. The only way to know your own is to do a breakevenanalysis. Don't worry; it's a simple calculation. Justfollow these steps:
2. Determine your cost of goods. Cost of goods is theamount of money you spend to produce the goods and services yousell. This expense will vary each month, depending on how manysales you make. To figure your breakeven point, you will need toknow the cost of goods for one unit of your product. Then subtractthe cost of goods from the retail price of one unit. The resultingnumber is your gross profit per unit of sale.
3. Determine your breakeven point. You can determine yourbreakeven point for the month with the following formula: Monthlyoperating expenses / gross profit per unit. For example, let'ssay you are operating a mail-order business that sells sunglassesand that you own the small manufacturing plant where thesesunglasses are produced. Your operating expenses are $10,000 amonth. The cost to manufacture and ship each pair of sunglasses is$5, which is your cost of goods. Through research, you havedetermined that you can sell the sunglasses for $15 a pair.Therefore, your gross profit per unit is $10. Based on thatinformation, the formula works like this:
$10,000 monthly operating expenses / $10 gross profit per unit =1,000 units to sell
What does this mean? You will have to sell 1,000 pairs ofsunglasses each month to pay all your expenses and break even. Youcan also calculate the volume of sales in dollars that you wouldneed in order to break even. To do this, multiply the number ofsunglasses you need to sell by the selling price:
1,000 pairs of sunglasses x $15 = $15,000 in sales necessary toreach breakeven point
Where Do You Go FromHere?
Many entrepreneurs assume that big sales will automatically lead tobig profits. But profit only comes after you have paid all thebills and exceeded your breakeven point. And, while achieving thebreakeven point is a reason to celebrate, at that point, you, asthe business owner, probably aren't getting a paycheck. Formost 'treps, the paycheck comes when your biz begins earningenough profit.
So now you've answered one of the biggest questions any newentrepreneur has in mind: At what point does my company break even?Armed with that information, you can determine what it will take tomove into the profit zone, and you can begin setting goals to reachthe level of earnings you had in mind when you started yourbusiness.
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