PROBLEM: Your business plan is based on a profit of 8 percent and, after your first quarter in business, you discover you aren't even close. Worst of all, you aren't certain if you are including all the necessary variables.
SOLUTION: Perform a break-even analysis. This is a way of determining when your business has reached the break-even point. Only after you've done this can you get on the road to profitability. The formula you use depends on whether you sell a product or a service:
If you sell a product:
1. Determine which items are your fixed costs. These cost the same regardless of your sales volume (rent, salaries, utilities, etc.).
2. Identify your variable costs. These are the ones incurred specifically to make and sell your product (materials, commissions, etc.).
3. Add items that are neither fixed nor variable (advertising, etc.).
4. Total these three categories.
5. Subtract your variable costs from your sales total to determine your contribution margin percentage. Your total fixed costs, divided by the contribution margin percentage, give you your sales break-even point, in dollars. To get your break-even point in products, divide the contribution margin by your total number of units produced. Then divide your total fixed costs by the contribution margin per unit.
If you sell a service:
1. Perform the first four steps.
2. Divide your total income by your total expenses. If your income exceeds your expenses, you are profitable.
Q & A
By Laura Tiffany
Q: I'm thinking of starting a business helping people focus and follow through on their goals by using "coaching" methods. Many entrepreneurs are very scattered and could use a "mom" to make sure they follow through on their daily tasks. Should I hire a marketing consultant to do a feasibility study to make sure this is a good idea?
A: Provided by Betty J. Otte, a counselor at the Service Corps of Retired Executives (SCORE). She is available for free SCORE consulting over the Internet at email@example.com
By asking the question "Should I hire a marketing consultant?" you imply you have the funding to hire a consultant. Good, current market research information is very expensive and is only as valid as the user's ability to interpret it. If you hire a market research firm, make sure you ask them to gather only the data you need and that you understand the method by which they are gathering the information and the sources from which the data is compiled. If you don't have a basic understanding of the data, it's impossible to evaluate it.
Because of the cost of hiring market researchers, many start-up entrepreneurs prefer to do their own research. Before you begin, make sure you have an accurate profile of your potential customer. Questions you should answer include:
- Who will want your coaching services?
- How much will they be willing to pay?
- What are their financial resources?
- What exactly will you do for clients? What goals will you help them achieve?
- Who is your competition?
- How will you differentiate yourself from professional organizing consultants?
You can collect market research through observation, by talking to your target market in face-to-face interviews or focus groups, by surveying potential clients over the phone or by mailing out questionnaires. No matter which method you use, you must find out if potential clients will use your services and how much they would be willing to pay for them.
Observational methods you can use include: 1) Studying your competition. Who are their clients and how do they get them? 2) "Picking the brains" of people in compatible businesses. Would they be willing to do a cross-promotion with you? and 3) If possible, talking with people who have used similar services.