By the time your financial model is built, your business model should so well understood that you could go toe-to-toe with any banker or investor. Now it’s time for a gut check. Let’s use those projections to calculate the sales required to breakeven. While a straight-forward calculation, this is often an eye-opening number.
Let’s consider a gift shop as an example. The average order size at this shop is $3, and the cost to deliver is $1. This makes the gross profit per unit $2. Next, suppose the overhead (rent, utilities, inventory, and employees) to keep the doors open is $30,000 per month.
By dividing the monthly overhead of $30,000 by the gross profit of $2, we see that the shop needs to sell 15,000 units per month to break even. Sounds reasonable enough, right? At this point you might hear an entrepreneur say something along the lines of, “There’s a ton of foot traffic, so we can make this work.”
Well, let’s break it down further. 15,000 units per month is 500 per day. Even if the founder is breaking her back working for 12 hours a day, she still needs to sell about 42 per hour. That’s one sale every 1.5 minutes, all day every day – that’s not the most realistic plan.
Do a breakeven analysis for your company to see if you’re on the right track, or if your business model might need some re-engineering.
