business - Move Into the Profit Zone

(YoungBiz.com) - Here's something that may seem abit hard to fathom: as a new 'trep, you're actually goingto celebrate when your business reaches the zero profitmark. Sound crazy? It does until you realize that that is the pointwhen your business makes the transition from operating at a loss(the place where most businesses begin) to the place called thebreakeven point--and on to the profit zone.

Of course, the breakeven point--the point when your salesexactly cover your monthly expenses--is different for everybusiness. The only way to know your own is to do a breakevenanalysis. Don't worry; it's a simple calculation. Justfollow these steps:

1. Estimate your operatingexpenses. These are the bills you have to pay every month,regardless of how many sales you make. Rent, if you pay it, is oneexample, and is usually one of the largest expenditures anentrepreneur has to pay on a regular basis. Other examples includeloan payments, business insurance, phone bills, office supplies andyour monthly Internet service fee. Do your best to estimate themonthly operating expenses for your business.

2. Determine your cost of goods. Cost of goods is theamount of money you spend to produce the goods and services yousell. This expense will vary each month, depending on how manysales you make. To figure your breakeven point, you will need toknow the cost of goods for one unit of your product. Then subtractthe cost of goods from the retail price of one unit. The resultingnumber is your gross profit per unit of sale.

3. Determine your breakeven point. You can determine yourbreakeven point for the month with the following formula: Monthlyoperating expenses / gross profit per unit. For example, let'ssay you are operating a mail-order business that sells sunglassesand that you own the small manufacturing plant where thesesunglasses are produced. Your operating expenses are $10,000 amonth. The cost to manufacture and ship each pair of sunglasses is$5, which is your cost of goods. Through research, you havedetermined that you can sell the sunglasses for $15 a pair.Therefore, your gross profit per unit is $10. Based on thatinformation, 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 ofsunglasses each month to pay all your expenses and break even. Youcan also calculate the volume of sales in dollars that you wouldneed in order to break even. To do this, multiply the number ofsunglasses you need to sell by the selling price:

1,000 pairs of sunglasses x $15 = $15,000 in sales necessary toreach breakeven point

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Move Into the Profit Zone Good news: You've reached the breakeven point! That means you can start making some serious cash.