Will My Business Make Money?
by
Bethany K. Laurence, J.D.
Prepare a break-even analysis before spending time on a complete business plan.
How can you tell if your business idea will be profitable? Honestly, you can't. But this shouldn't keep you from researching the financial soundness of your idea. Prepare a "break-even analysis" (determine your break-even point) to get an idea of whether your business will succeed.
What a Break-Even Analysis Tells You
A break-even analysis shows you the amount of revenue you'll need to bring in to cover your expenses, before you make even a dime of profit. If you can attain and surpass your break-even point -- that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses -- then your business stands a good chance of making money.
Many experienced entrepreneurs use a break-even analysis as a primary screening tool for new business ventures. They won't write a complete business plan unless their break-even forecast shows that their projected sales revenue far exceeds their costs of doing business. The good news is that a break-even analysis is part of every business plan, so if you start by doing a break-even analysis now, you'll have already started work on your business plan.
How to Prepare a Break-Even Analysis
To perform a break-even analysis, you'll have to make educated guesses about your expenses and revenues. You should do some serious research -- including an analysis of your market -- to determine your projected sales volume and your anticipated expenses. Business plan books and software can teach you how to make reasonable revenue and cost estimates.
You'll need to make the following estimates and calculations:
|
