So, you’re starting a new online venture eh! Good for you, no really, good for you. It’s soooo easy to start a new business every day on the internet, I gave myself a challenge and done that very thing. In 7 days I created 7 different businesses and it cost me a massive $137!
“Big Deal” I hear you say….and you’d be right. Because without the proper planning, research, break-even analysis (sorry, sounds boring but essential!) then you could create a 100 businesses in 100 days, doesn’t mean any of them are going to be profitable!
Don’t get in the habit of creating businesses for the hell of it! It will suck up your time and motivation.
Research is the key!
Below is an extract from a fabulous article from the boys and girls over at Shopify, if you read nothing else this week, make sure you read this:
Starting a business often carries risk. As the saying goes, “You have to spend money to make money.”
While that’s not always true, there is one very effective way to lower your risk: do a break-even analysis. A break-even analysis will tell you exactly what you need to do in order to break even and make back your initial investment.
If you run a business—or you’re thinking about starting one—you should know how to do a break-even analysis. It’s a crucial activity for making important business decisions.
What is Break-Even Analysis?
Break-even analysis sounds complicated, but it’s actually quite simple. It’s a calculation that will tell you how many units of something you need to sell to break even.
For example, how many laptop cases you need to sell to cover your warehousing costs. Or how many hours of service you need to sell to pay for your office space. Anything you sell beyond your break-even point will add profit.
There are a few definitions you need to know in order to understand break-even analysis.
Fixed Costs: Expenses that stay the same no matter how much you sell.
Variable Costs: Expenses that fluctuate up and down with sales.
Break-Even Analysis Formula
Before we start calculating break-even points, let’s break down how the formula works.
Your break-even point is equal to your fixed costs, divided by your average price, minus variable costs.
Break-Even Point = Fixed Costs/(Average Price — Variable Costs)
Basically, you need to figure out what your net profit per unit sold is and divide your fixed costs by that number. This will tell you how many units you need to sell.
As you now know, your product sales need to pay for more than just the costs of producing them. The remaining profit is known as the contribution margin because it contributes cash to the fixed costs.
Now that you know what it is, how it works, and why it matters, let’s break down how to calculate your break-even point.
Read more to see if your business venture is likely to be profitable at Shopify