Entrepreneurship Week 13 Break Even Analysis

Assignment Dates April 25 – Business Plan -- part 4 May 2, 4, 9, 11 – Business Plan presentations

Next Week April 18 & 20 – no Class April 21 & 24 – Bring Business plan Part 4 to my office for review. Any time from 10:00 to 12:00 and 1:00 to 4:00

Business Plan – Part 4 Break-even Analysis Given the fixed costs you will have for a year (start up costs plus all your monthly expenses like rent and pay), how many products do you have to sell to cover all those costs (to “break even”)?    

Break-even concept If my store rent is 200 OMR and my labor cost is 100 ORM each month, what is my total cost for the month? If I sell cell phones and make 5 OMR profit on each phone, how many phones do I have to sell each month to pay all my costs (break even)?

Break-even concept Fixed cost – a cost I must pay even if no customer buys my product (store rent, employee wages, electricity) Marginal cost – cost incurred if I sell a product (cost of good sold)

Break Even Which of these costs are “fixed”? Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 500 Office costs 315 Start up costs  1250   C.O.G.S.  300 300 Total costs

Calculate labor costs for the year – Break Even Analysis Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 500 Office costs 315 Start up costs  1250   C.O.G.S.  300 300 Total costs Calculate labor costs for the year – Calculate office costs for the year – Calculate start up costs for the year – How much are my total fixed costs for the year?

Calculate labor costs for the year – Break Even Analysis Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 500 Office costs 315 Start up costs  1250   C.O.G.S.  300 300 Calculate labor costs for the year – Calculate office costs for the year – Calculate start up costs for the year – How much are my total fixed costs for the year? If I made 2 OMR profit on each product I sold, how many products would I need to sell to cover the costs?

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”) Cost of Goods Sold – costs that only occur if you sell a product - food for your restaurant, clothing for your store (“marginal costs’)

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

Achieving profit Monthly income = unit income * units sold – fixed costs My Flower Shop earns (.150 OMR profit * 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 Break Even 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?

Break Even 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.

Break even – dress shop If I make a profit of 4 OMR on each dress I sell, how many dresses do I need to sell to cover the costs of my first 6 months in business? Month 1 2 3 4 5 6 Labor costs 500 Store costs 315 Equipment purchase 400   Advertising 100 C.O.G.S.

Break even – cold store If I make an average profit of 0 Break even – cold store If I make an average profit of 0.1 OMR on each item I sell, how many items do I need to sell to cover the costs of my first 12 months in business? Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 200 Store costs 300 Equipment purchase 900   Advertising 100 C.O.G.S. Total costs

Break even analysis – ice cream shop Month 1 2 3 4 5 6 7 8 Labor costs 200 Store costs 300 Equipment purchase 600   Decorating 100 If I buy ice cream for 0.1 OMR per scoop and sell it for .300 OMR per scoop, how many scoops do I need to sell to cover my costs for 8 months?

Break even analysis Month 1 2 3 4 5 6 7 8 Labor costs 200 Store costs 300 Equipment purchase   Decorating 100 When I start my ice cream shop I am able to find a very good used refrigerator, so my equipment costs are only 300 OMR. Now how many ice cream scoops do I have to sell to break even if I buy ice cream for 0.1 OMR per scoop and sell it for .300 OMR per scoop ?

Break even analysis Month 1 2 3 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 ice cream scoops do I have to sell to breakeven if I buy ice cream for 0.1 OMR per scoop and sell it for .300 OMR per scoop ?

Break even analysis Month 1 2 3 4 5 6 7 8 Store costs 300 Equipment purchase   Decorating 100 I pay no attention to my business professor and decide I will compete by having the lowest cust0mer prices. I pay 0.1 OMR per scoop and sell ice cream for 0.15 OMR per scoop. How many scoops do I need to sell to cover my costs?

Break even – watch store If I make an average profit of 12 OMR on each watch I sell, how many watches do I need to sell to cover the costs of my first 12 months in business? Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 200 Store costs 600 Equipment purchase 900   Advertising 1000 C.O.G.S.

Break even – Tour Operator If I make an average profit of 100 OMR on each tour I give, how many tours do I need to give to cover the costs of my first 12 months in business? Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 600 Travel costs Equipment purchase 900   Advertising 2000 C.O.G.S.

Initial Finance How much money do you need to cover startup costs – and – the period where you are cash flow negative?

Initial financing – dress shop Projected sales are 100 dresses per month What if sales are lower? 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

Ice cream shop - financing example IF you meet sales projects, you go cash flow positive after 3 months, so you need 1000 OMR 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 - financing example what if you sell just 100 cups per month? Buy 100 cups (250 bz) – sell 100 cups (500 bz) 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. 25 Total costs 900 375 Revenue  50 50 Profit/(loss) (900) (325) Yearly profit/(loss) (1225) (1550) (1875) (2200) (2525) (2850) (3175) (3500)

Business Plan Part 4 Finance section Calculate how much money you would need if your business had no revenue for 12 months. That is your need for financing. State the amount and explain it. Explain where you will get the money.

Business Plan Part 4 Finance section Sources of money: Your savings Your family A bank loan A grant Investors

Financing – Tour Operator If I receive an average 100 OMR on each tour I give, and I give 5 tours per month for the first year, how much will I need to borrow to stay in business for a year? Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 600 Travel costs Equipment purchase 900   Advertising 2000 Total costs Revenue Profit/(loss) Yearly profit/(loss)

Financing – Khanjar shop If I pay 30 OMR for each khanjar and sell them for 50 OMR, how much will I need to borrow to stay in business for a year if I sell 40 khanjars per month? What if I sell none? Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 150 shop costs 200 Equipment purchase 100   COGS Total costs Revenue Profit/(loss) Yearly profit/(loss)