Break Even Broken Down

earth profit

The break even analysis is something most small business owners and entrepreneurs have heard of. It is a formula used to determine the sales a business must generate to pay off their total expenses. A thorough break even analysis should always be done before entering into a venture.

There are two types of expenses:

  • Fixed Expenses – These are expenses that don’t regularly change each month, even if there is an increase or decrease in production. Rent, utilities, insurance, janitorial fees, interest on debt, permit fees and salaries of full time workers are typical examples of fixed costs. So if production were to slow or even stop, these costs would generally stay the same.
  • Variable Expenses – These are expenses which are tied directly to production and can fluctuate depending on the volume produced. For restaurant owners, raw food costs, hourly labor, paper products and waste are good examples of variable costs.

Fixed costs are much easier to determine than variable costs, so start there. Be thorough, be realistic and be objective. Wishful thinking while doing this important calculation can lead to large losses. Variable costs require careful calculation as they are related directly to production. The raw ingredients, the labor required to combine those ingredients and the costs involved in selling the completed product, in any business, are the most important factors in determining whether a worth while profit can be attained.

So here is the actual equation:

Breakeven Point = Fixed Costs / (Selling price of unit – Variable costs per unit)

That’s it in a nutshell. This simple calculation with help you determine how many units you will have to sell in order to pay your monthly expenses. If you sell multiple products, like in a restaurant, simply calculate the average price and average cost of your menu items.

Two Examples:

  1. Joe’s Pub – It costs Joe $10,000 per month in rent, utilities, insurance and fees to run his pub. The average price of a drink is $5. Joe spends $1 in alcohol, mixers and labor costs to make that drink.  Breakeven -> $10,000 / ($5 – $1) = 2500 drinks. So Joe needs to sell 2500 drinks per month to pay his expenses. If Joe has an average of 50 customers per day who buy 2 drinks each, then he’s obviously in good shape.
  2. Ipodsforsale.com – It costs $6000 per month in hosting, programming, salaries and fees to run the website. They are selling Ipods for $250. They purchase the Ipods from Apple for $200. Most of their customers are generated from Google Adwords, and since Ipod is a competitive keyword, it costs an average of $5 in marketing for every sale. Breakeven -> $6000 / ($250 – ($200 + $5)) = 133 Ipods. So Ipodsforsale.com must sell 133 Ipods per month to stay in business.

But that’s so simple you say. Exactly! But a high percentage of rookie entrepreneurs (and veterans) will not give this analysis the attention it deserves. As a result, they will squander their money and valuable time on a poor business model. This analysis should be on the top of every entrepreneurs list when considering a new venture.

The Perfect Business Card

Mike Mulhall Business Card Business Card Back

Making the perfect business card is tough. But here are a few tips that may help:

  1. Don’t skimp on cards! – Business cards are important. They’re great marketing tools and they’re the usually the first visual item that people see representing your business. So forget the perforated business cards from Office Depot everybody. You need to find a real printer.
  2. Use quality stock – The thicker and sturdier the card the better. Flimsy cards don’t say anything good about you or your business…trust me on this one.
  3. Use the back – Depending on the industry you’re in, why not try to fit as much marketing material on your card as possible. As you can see from my card above, I put a map that even points out parking locations for customers.
  4. Don’t forget the vital info – For god’s sake, don’t forget any vital contact info. If you’re an internet company, don’t forget your website or email. If you’re a lawyer, a fax number would probably be important.
  5. Be different. Be original. But don’t go crazy – Your card should represent your brand and your ideas. Too plain of a card and it’s just boring. Too much and it’s just annoying. This really depends on the type of business your in. Try not to clutter the card. Sometimes less is more or more is just more…it really depends.
  6. If all else fails, hire a designer. If you don’t feel confident in your design abilities, there are plenty of services that can create a card for you. I use a service called Logoworks for all of my designing needs. As for printing, I use a company called Printplace.com. They can do everything, from business cards to brochures to stickers and they have the best prices I’ve ever seen. I just ordered 5000 full color double sided business cards for $50! Eat your heart out Kinkos…

The 3 Pillars

A good friend once shared with me the secret to his company’s success. He called it the 3 tier supportive structure (he was an engineer)…I just call it the 3 Pillars.

There’s 3 pillars in business and each pillar supports the other.

  1. Employees – Treat them well, make them your first priority.
  2. Customers – Happy employees means happy customers.
  3. Investors – Happy customers create happy investors.

I had to laugh at its simplicity…but it’s amazing how many business owners forget this core principle. Entrepreneurs tend to over analyze and complicate. Simplicity is key..

Did it work for him? He took over a small company and turned it into a multi-billion dollar juggernaut of his industry…he’s the only guy I knew that had the President on speed dial…

Got Plans? Stick with them…

Business Plan

Today, out of the complete blue, I was contacted by a business associate of mine. He’s about my Dad’s age, incredibly successful, and I actually look up to him and his accomplishments.

So you can imagine my surprise when he called me, embarrassed, asking for help in writing a business plan for an industry I have experience in…the restaurant biz. He told me he wouldn’t get into a business without a solid plan. I could hear the wisdom and experience oozing from the words as he spoke them. Most beginning entrepreneurs don’t understand the importance of that statement.

Create a well thought out, well researched plan, and STICK with it. Be realistic with your projections, maybe even pessimistic. And don’t EVER sell yourself on an idea before considering the realities, pitfalls and weaknesses of it. I’ve made to many bad decisions in business because my judgment was clouded by visions of grandeur and only the good. I suppose you could call it “dreamer’s denial.”

I’ve used business plan writing software, and worked from premade templates which you can find all over the internet. Look for industry average numbers (ex. Labor should be 25% of your gross, etc.) which can either be found from research or contacting someone who has experience in that specific industry.

But always remember…make a plan and follow it. You may have to improvise and adapt, but the core business plan should remain intact. If you wing it, you’re weakening your position and greatly reducing the odds of being successful.

Don’t be a gambler…be a planner…