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Break-Even Analysis: Will Your Business Make Money?

Some people have a bigger problem than others when opening a new business. These are folks who are positively enamored with their business concept and are desperately eager to begin. They are so smitten and eager to start, they have no patience with the economic realities involved in their business. If you recognize this tendency in yourself, its extra important that you prepare a financial forecast carefully and pay attention to what it tells you.

Just because you can’t be sure you will make money doesn’t mean you should throw up your hands and ignore the whole problem. You can and should make some educated guesses. I like to call them SWAGs (“Scientific,” Wild Ass Guesses). The challenging part is to make your profit estimate SWAGs as realistic as possible and then make them come true

The best way to make a SWAG about your business profitability is to do a breakeven forecast. Although a break-even analysis or forecast can never take the place of a complete business plan, it can help you decide if your idea is worth pursuing.

For most small businesses, the difference between success and failure lies with keeping costs down. Many smart people start successful businesses in a spare room in their house, the corner of a warehouse, or a storefront in a low-rent neighborhood. Unfortunately, others sink their original capital into essentially cosmetic aspects of their business, such as fancy offices, and then go broke

Conclusion

Make a list of the fixed or regular monthly expenses of your business. Your objective is to develop a dollar amount of expense that you are committed to pay every month. This is your “nut,” or the dollar figure you must be able to pay to keep the business viable. Include rent, utilities, salaries of employees, payroll taxes, insurance payments, postage.

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