Determining a Break-Even Point to Create a Foundation For a Small Business Plan
Many people are interested in turning their passion for beading into a business, but it can be intimidating to enter the realm of entrepreneurship. The notion of starting a small business can be intriguing, but in the end, it may not be as profitable as you expect. It's important to gauge how much revenue you will generate in comparison to your expenses to determine if your idea is a worthwhile investment.
First, you will need to determine estimates for fixed costs. These numbers includes things such as rent, utilities and insurance. To play it smart, also add 10 percent to account for unexpected emergencies.
|Prior to hitting the gas pedal, calculate your break-even point prior to making any big decisions. A break-even analysis will help you find how much profit you need to generate in order to cover your base expenses, according to Nolo, a legal information resource. If you find that you can easily pay for your expenses with your projected sales revenue, you have a greater chance of your company succeeding.
Experienced entrepreneurs rely on using a break-even analysis to determine whether an idea is worth investing in prior to developing a business plan. Without a projected profit, it may not be worth one's time in the long-run. A break-even analysis is also an ideal starting point for a future business plan.
In order to conduct an accurate break-even analysis, you will need to do an ample amount of research. Not only will this involve gathering information on the industry and your competitors, but it will require you to make relevant predictions on your future company.
Accurate estimates can save your business.
Sales revenue is another estimate that needs to be made during the process. This involves creating a projection of the amount of sales you expect to make on a month-to-month or annual basis. The number should be accurate, rather than a forecast of what you would like to make over the course of a year.
Next, you will need to determine the average gross profit for each sale. This means calculating an estimate of how much money you will have left after paying the direct costs of a sale. Lastly, factor in the average gross profit percentage. This will help you find out how much each dollar of sales income is a part of your overall profit.
When you have finalized these estimates, it's time to calculate your break-even point. This can be accomplished by dividing your annual fixed costs by your gross profit percentage. In the end, you will have a number that tells you the amount of sales revenue you will need to generate in order to break even.
Many small business owners are discouraged when they calculate the numbers and determine that their break-even point is higher than their projected revenue. However, there are ways that entrepreneurs can modify their estimates in order to increase their chances of generating a profit.
First, ask yourself if there is a cheaper way to obtain the necessary supplies to operate your business. Look for wholesale vendors who are willing to build relationships with start-up companies for the future. Try to cut additional corners by determining if you can do with less employees as well. Freeing up salary space can give your business more room to grow.
If your small beading company can start out from your own home office, opt to do so in the beginning of your business. This will reduce some of the fixed costs that you would otherwise be spending on a commercial space. It's not always efficient to work from home, but when possible, doing so can save an admirable amount of money in the beginning of your business.
Although it's not the ideal route to take, you can choose to increase the price of your product or service to make ends meet. Depending on the market and the success of your competitors, you might be able to get away with selling your items at a higher than average price. However, keep in mind that meeting customer demands should remain a priority throughout the initial stages of your new company.
When you move into the advanced stages of creating your business plan, you will need to develop estimates for your cash flow, start-up expenses and forecast profits and losses. However, determining your break-even is the first step toward accurately projecting the success of your small beading business. Doing so can help you avoid making mistakes that result in the failure of your company.
A financial advisor can help you make estimates to increase the chances of your business staying afloat past the first year of operation. Enlisting help from a professional can be a worthwhile investment for your entrepreneurial career.
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