Kids Kreative Korner
THE BREAK-EVEN POINT
Your Business Plan Should Include a Focus on How You'll Cover Expenses.
By Bonnie Drew
In preparing a business plan, you'll need to figure how much you have to sell to break even.
Suppose you sold 50 leather belts, 50 hand-strung necklaces, and 50 pounds of gourmet chocolates from your flea market booth last month. It sounds like you made a lot of money. But before you can take any money out of the business, you must pay your cost of goods and operating expenses.
This is the formula for figuring profit:Income - Expenses = Profit
Income = Everything you get paid
Expenses = Everything you spend to run your business
Profit = The money you have left after you subtract your expenses from your income
Most businesses don't make a profit when they first start out. During the start-up phase, the first big goal is to reach the break-even point, the happy day when your income covers all the expenses and you're no longer operating at a loss.
It is very important to know how many sales you have to make to reach the break-even point every month. Steve Mariotti of NFTE advises young entrepreneurs to use a system he calls the Break-Even Analysis. These are the steps he recommends:
1. Estimate your monthly operating expenses (don't confuse cost of goods with operating expenses).
2. Divide your operating expenses by the gross profit you make every time you sell one unit.
3. The result is the number of units you must sell to cover all expenses and reach the break-even point.
Let's say you have a watch-selling business and have $50 in monthly operating expenses. The gross profit on each watch is $5, which you can use to pay the operating expenses. If you divide $50 by $5, you will find you need to sell 10 watches to reach the break-even point each month.
In your business plan, be sure to include a section that focuses on your break-even point and how you plan to achieve sales to cover your expenses.
Bonnie Drew is the author of FAST CASH FOR KIDS (2nd edition), published by Career Press (1-800-227-3371). She is also the creator of the KIDS BUSINESS software for young entrepreneurs, available from Homeland Publications (713-332-9764).
Drew is also Editor of YoungBiz online magazine, published by Kid's Way, Inc., a company that helps youth prepare for business and the workplace of the 21st century. For more information, write to Kid's Way at 5589 Peachtree Rd, Chamblee, GA 30341 or call toll free 1-888-KidsWay (1-888-543-7929). YoungBiz magazine can be found at http://www.youngbiz.com
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