(YoungBiz.com) - Here's something that may seem a bit hard to fathom: as a new 'trep, you're actually going to celebrate when your business reaches the zero profit mark. Sound crazy? It does until you realize that that is the point when your business makes the transition from operating at a loss (the place where most businesses begin) to the place called the breakeven point--and on to the profit zone.
Of course, the breakeven point--the point when your sales exactly cover your monthly expenses--is different for every business. The only way to know your own is to do a breakeven analysis. Don't worry; it's a simple calculation. Just follow these steps:
2. Determine your cost of goods. Cost of goods is the amount of money you spend to produce the goods and services you sell. This expense will vary each month, depending on how many sales you make. To figure your breakeven point, you will need to know the cost of goods for one unit of your product. Then subtract the cost of goods from the retail price of one unit. The resulting number is your gross profit per unit of sale.
3. Determine your breakeven point. You can determine your breakeven point for the month with the following formula: Monthly operating expenses / gross profit per unit. For example, let's say you are operating a mail-order business that sells sunglasses and that you own the small manufacturing plant where these sunglasses are produced. Your operating expenses are $10,000 a month. The cost to manufacture and ship each pair of sunglasses is $5, which is your cost of goods. Through research, you have determined that you can sell the sunglasses for $15 a pair. Therefore, your gross profit per unit is $10. Based on that information, the formula works like this:
$10,000 monthly operating expenses / $10 gross profit per unit = 1,000 units to sell
What does this mean? You will have to sell 1,000 pairs of sunglasses each month to pay all your expenses and break even. You can also calculate the volume of sales in dollars that you would need in order to break even. To do this, multiply the number of sunglasses you need to sell by the selling price:
1,000 pairs of sunglasses x $15 = $15,000 in sales necessary to reach breakeven point
Where Do You Go From
Many entrepreneurs assume that big sales will automatically lead to big profits. But profit only comes after you have paid all the bills and exceeded your breakeven point. And, while achieving the breakeven point is a reason to celebrate, at that point, you, as the business owner, probably aren't getting a paycheck. For most 'treps, the paycheck comes when your biz begins earning enough profit.
So now you've answered one of the biggest questions any new entrepreneur has in mind: At what point does my company break even? Armed with that information, you can determine what it will take to move into the profit zone, and you can begin setting goals to reach the level of earnings you had in mind when you started your business.