yummy part 4

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Break-Even Analysis Finally, you want to determine how much income you must earn to pay your expenses — at what point you break even. At the break-even point you are neither making a profit nor losing money; you have just covered the cost of staying in business and making your sales. Most people new to business assume their break-even point is when sales equal the amount of fixed expenses: rent, telephone, insurance, and so forth. Fixed expenses are easy to determine, since they are in place from the time you first open your doors, and they remain relatively stable regardless of the amount of sales. But because almost all sales have some costs associated with them, you must also figure the variable cost of sales into your break-even analysis; otherwise you do not have a true picture of your cost of doing business. For instance, if you are a florist and your fixed expenses (rent, utilities, salaries, and so on) are $20,000 a month, it’s not just enough to make $20,000 in sales: You would still be losing money. You must pay for flowers, vases, delivery, and commissions to floral wire services before you earn income on a sale. If these costs amount to an average of 30% of the cost of each sale, at $20,000 in income, you’re still $6,000 in the hole ($20,000 in fixed expenses plus $6,000 in costs of goods). “The best business plans are a combination of a PowerPoint presentation and a succinct and well-thought-out operating model, showing how the business would be run on the revenue and expense side. The most important thing is that it’s based on the formula: revenue equals price times quantity. It should be a ‘bottom up’ financial model rather than ‘I’m going to get 10% of the market.’ ” Mark Gorenberg Venture Capitalist The total cost of goods keeps rising as your sales rise; unlike your fixed costs, the figure keeps changing and is harder to pin down. But your gross profit margin — the average percentage you earn on each sale after direct costs are deducted — stays basically the same. (As you sell greater amounts, you may be able to increase your profit margin by receiving volume discounts; for the purpose of this exercise however, you can assume a stable gross profit margin.) To determine an actual break-even point, you must know your: ■ Fixed expenses ■ Gross profit margin (average percentage of gross income realized after cost of goods) Then, to figure the amount of total sales needed to break even, you work the equation: In the above example of the florist, we know: ■ Fixed Expenses = $20,000 ■ Gross Profit Margin (GPM) = 70% (since cost of goods is 30%) So, the numbers would look like: Doing the arithmetic, we see that this florist must make $28,571 to reach the break-even point. A break-even analysis is an important tool for your internal planning. However, it is not necessary for you to include a break-even analysis in a business plan submitted to outside funding sources. (Of course, there is nothing wrong with including it if you wish.) Break-Even Analysis

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SAMPLE PLAN: ASSUMPTIONS ASSUMPTIONS The figures on the previous financial forms are based on these assumptions: These sales figures reflect price increases of 10% annually for Corporate Training Center classes and online classes; 15% in 2015 and 10% in 2016 for corporate on-site training classes, and 10% in 2015 and 15% in 2016 for Saturday classes. Personnel The staff size of the company (two FT professionals and one PT support) will stay constant for the remainder of 2014. In 2015, the payroll increases to four FT professionals, one FT support, and one PT support. In 2016, the payroll is projected at four FT professionals, one PT professional, and two FT support. Expansion Figures in these projections assume opening a second Training Center classroom on 1/1/15. Direct costs associated with expansion include leasehold improvements, equipment/furniture, and marketing. Additional operating costs include equipment rental and addition of a staff trainer. This expansion increases capacity in corporate training classes by 100%. Financing To date, ComputerEase has been financed by a $60,000 investment from Scott E. Connors; a $30,000, 10% interest-only loan from L. Silver (Mr. Connors’ sister-in-law), due 12/31/14; and a $40,000 no-interest loan from Mr. Connors, principal due on or before 3/31/15. Projections call for the retirement of $30,000 of the Connors loan in 2014, with the remainder by 3/31/15, and the remainder of the Silver loan when due. The 2015–16 financial projections assume securing an additional $160,000 of investment income by 1/1/15.