1. Entrepreneurship Week 10 Break Even Analysis

2. 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?

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

4. 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’)

5. 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.

6. 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.

7. 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

8. “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?

9. 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?

10. “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?

11. 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.

12. 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

13. Cash Flow goes positive after 6 months1
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

14. 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 * * ( = 9280)
/10 OMR per dress
10680/10 = 1068 dresses sold to break even

15. Flower shop cash flow goes positive after 8 months1 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)

16. 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 office costs) / marginal income of .6 OMR per flower (purchase for 200 baisas and sell for 800 baisas)
/ .6 = flowers I need to sell in the first year to break even

17. 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?

18. 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?