Entrepreneurship Week 11 Break Even Analysis

Assignment Dates December 9 – Business Plan -- part 3 December 14 & 16 – Group Presentations December 21, 23, 28, 30 – Business Plan presentations

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’)

Monthly income = unit income * units sold – fixed costs “Real” Income Monthly income = unit income * units sold – fixed costs My restaurant earns 1.500 OMR on each meal sold How many meals 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

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 Continuing costs = 315 * 12 + 500 * 11 (3780 + 5500 = 9280)

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)

Break even analysis Month 1 2 3 – store opens 4 5 6 7 8 Labor costs 200 Store costs 300 Equipment purchase   Decorating 50 When I start my flower shop I am able to find a very good used refrigerator, so my equipment costs are only 300 OMR. I also cut my decorating costs to 50 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?

Ice cream shop cash flow example Month 1 2 – store opens 3 – 4 5 6 7 8 9 Labor costs 150 Store costs 200 Equipment purchase 600   Decorating 100 C.O.G.S. Total costs 900 450 500 550 Revenue  400 400 800 Profit/(loss) (900) (50) 250 Yearly profit/(loss) (950) (1000) (800) (550) (300)

Ice cream shop – Break even analysis Month 1 2 – store opens 3 – 4 5 6 7 8 9 Labor costs 150 Store costs 200 Equipment purchase 600   Decorating 100 If I buy my ice cream for .250 OMR per cup, and sell for 1 OMR per cup, How many cups do I have to sell to break even? (Assume labor costs and store costs for one year)

Ice cream shop – Break even analysis Month 1 2 – store opens 3 – 4 5 6 7 8 9 Labor costs 150 Store costs 200 Equipment purchase 600   Decorating 100 Example 2 - If I sell a special camel milk ice cream, it costs me .5 OMR per cup but I can sell it for 1.5 OMR per cup. How many cups do I have to sell to break even? (Assume labor costs and store costs for one year).

Ice cream shop – Break even analysis Month 1 2 – store opens 3 – 4 5 6 7 8 9 Labor costs 150 Store costs 200 Radio advertising 50 Equipment purchase 600   Decorating 100 Example 3 – I decide I will get more sales if I advertise my camel milk ice cream on the radio. It costs me .5 OMR per cup but I can sell it for 1.5 OMR per cup. How many cups do I have to sell to break even? (Assume labor costs, advertising costs, and store costs for one year).

Ice cream shop – Break even analysis Month 1 2 – store open 3 4 5 6 7 8 9 10 11 12 Labor costs 150 300 Store costs 200 Radio advertising 50 Equipment purchase 600   Decorating 100 Example 4 – Camel milk ice cream is so popular I hire a second worker in month 4. Now how many cups do I have to sell to break even? (Assume labor costs, advertising costs, and store costs for one year).