Entrepreneurship Week 10 Break Even Analysis

Business Plan part 2 - checklist ____ Survey of potential customers – summarize what you learned. Attach the responses from each person surveyed. ____ Describe your business including any changes you plan because of what you have learned in the survey. ____ Describe 3 companies you will compete against. What do they do well? ____ Describe how you will compete with those three companies. What can you do that is better?

Business Plan part 2 Due November 18 If the university is closed November 18 for National Day, the assignment is due Monday November23.

Cost categories Start up – An initial purchase for your business – usually equipment, or marketing materials Continual – payments you are usually committed to making every month (“fixed costs”) By sale – costs that only occur if you sell a product - food for your restaurant, clothing for your store (“marginal costs’)

Cost Problems Start up – high start up costs require that you have more money to start the business Continual – high fixed costs mean you will lose money quickly if you do not have many sales By sale – low marginal revenue means you make very little from each sale, so you will need to sell many items to cover your costs.

Cost Responses Start up –Find ways to reduce your startup costs – buy used equipment or sell over a web site rather than through a store Continual – reduce fixed costs by using less labor, or rent a smaller store By sale – increase marginal revenue by raising your prices. Do NOT complete on low cost, but by better service or some other competitive advantage.

Estimating Income Marginal Income = sales – cost of good sold 1 flower Income = .200 (customer price) – .050 (my cost for the flower) Marginal Income = .150 OMR

“Real” Income Monthly income = unit income * units sold – fixed costs My Flower Shop earns (.150 OMR * number of flowers sold) – Fixed costs (store rental, labor, web site, phones, electricity, etc.) If you sell 1000 flowers and your fixed costs are 500 OMR, will your store turn a profit this month? If not, how many do you need to sell?

Monthly income = unit income * units sold – fixed costs “Real” Income Monthly income = unit income * units sold – fixed costs My restaurant earns .500 OMR on each meal sold How many meals do I have to sell if my fixed costs are 800 OMR per month?

“Real” Income unit income * units sold = fixed costs My clothing store earns 4 OMR on each dress sold How many dresses do I have to sell if my fixed costs are 800 OMR per month?

Start up costs A new business does not just have fixed costs (rent and salaries), it also has start up costs (equipment, decorations, initial advertising). Start up costs need to be paid – usually over several months or a year.

Cash Flow – dress shop Month 1 2 – store opens 3 4 5 6 Labor costs 500 Store costs 315 Equipment purchase 400   Inventory purchase 1000 C.O.G.S.  1000 1500 Total costs 1715 1815 2315 Revenue  2000 2000 3000 Profit/(loss) (1715) 185 685 Yearly profit/(loss) (1530) (1345) (1160) (475) 210

Cash Flow goes positive after 6 months 1 2 – store opens 3 4 5 6 Labor costs 500 Store costs 315 Equipment purchase 400   Inventory purchase 1000 C.O.G.S.  1000 1500 Total costs 1715 1815 2315 Revenue  2000 2000 3000 Profit/(loss) (1715) 185 685 Yearly profit/(loss) (1530) (1345) (1160) (475) 210

10680/10 = 1068 dresses sold to break even Breakeven analysis Month 1 2 –store opens 3 4 5 6 Labor costs 500 Store costs 315 Equipment purchase 400   Inventory purchase 1000 Start up costs plus fixed costs for one year divided by profit per dress (this assumes you have a rental agreement for one year and a labor agreement for one year) Start up costs = 1400 OMR Fixed costs = 315 * 12 + 500 * 11 (3780 + 5500 = 9280) 1400 + 9280 /10 OMR per dress 10680/10 = 1068 dresses sold to break even

Flower shop cash flow goes positive after 8 months 1 2 3 – store opens 4 5 6 7 8 Labor costs 200 Store costs 300 Equipment purchase 600   Decorating 100 C.O.G.S. 400 Total costs 1000 500 700 800 900 Revenue 1200 1600 Profit/(loss) (1000) (500) Yearly profit/(loss) (1500) (1400) (1300) (1200) (800) (400)

Break even analysis Month 1 2 3 – store opens 4 5 6 7 8 Labor costs 200 Store costs 300 Equipment purchase 600   Decorating 100 Start up costs (700 OMR) + fixed costs (2200 labor + 3600 office costs) / marginal income of .6 OMR per flower (purchase for 200 baisas and sell for 800 baisas) 700 + 5800 / .6 = 10833 flowers I need to sell in the first year to break even

Break even analysis Month 1 2 3 – store opens 4 5 6 7 8 Labor costs 200 Store costs 300 Equipment purchase   Decorating 100 When I start my flower shop I am able to find a very good used refrigerator, so my equipment costs are only 300 OMR. Now how many flowers do I have to sell to break even?

Break even analysis Month 1 2 3 – store opens 4 5 6 7 8 Store costs 300 Equipment purchase   Decorating 100 I decide I will not hire a clerk, but will operate the shop myself. Now how many flowers do I have to sell to breakeven?