Break Even Analysis for Start Up Businesses
Break Even Analysis to Help Your Business Grow
So, you’ve come up with a great business idea. You’re passionate about the business and would class yourself as a potential expert. You know there is a market for your business and you know how to satisfy your customers.
Do you know when your business will start to make money?
Do you have enough funds to cover the costs of running your business and supporting yourself until your business can make enough money to cover these costs?
The first thing to do to ascertain this is to carry out a Break Even Analysis.
Start by asking yourself these questions:
How much will you charge for each item/hour of work? eg if we are to make and sell cupcakes we decide to sell each cupcake for £1
What are your variable costs ie what costs do we incur in order to make that item/deliver that hour of work? eg the cost of making our cupcakes is 50p each
What are your fixed costs ie the costs not directly related to making the item but that you need to run your business? eg rent, utilities and equipment cost us £2000 per month
How many items can you produce/hours you can work? (remember there are other jobs you need to do such as marketing and accounting so allow some time for those when working out how much time you have to produce items/work) eg we can make 10000 cupcakes.
OK, so now you’ve answered the questions above you now to input your answers in to the following formula:
(sales price x number of items/hours sold) – ( variable costs x number to be sold) – fixed costs = PROFIT
eg (£1 x 10000) – (50p x 10000)
eg £10000 – £5000
£5000 – £2000 (fixed costs) = £3000
This is a good exercise to do whether you are just starting up your business or wanting to expand. Make sure the business you are in can not just cover the costs of running it but also supporting the kind of lifestyle you want to live.
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