Is Your Business Viable?

If you are thinking of starting a business, the first thing you need to do is figure out if it will be viable.

So how do you decide if your business will succeed?

Step 1: Study the market in which you will be entering.

• Find the market price for comparable products.
• Find the average volume of sales for a comparably sized business in your market.

Let’s first talk about lending. Most likely when starting a business you will have to obtain start-up capital from a lender. One of the first things potential lenders are going to ask is if you have done a Break-Even Analysis. That is how you can prove to your potential lender that you will be able to pay back the money borrowed and this one is easy.

Once you have studied your market and found the average selling price (SP) and the average volume you are on your way. The other informatin you will need is your Fixed Costs (FC) and Variable costs (VC). Variable costs are costs that change with the number of units produced.

Lest’s say you determine that your FC will be $10,000, your variable costs are $5 per unit, and the SP is about $10. How many units will you have to sell in order to Break Even? Here we go…

The Break Even Quantity (BEQ) is found where your Total Costs (TC) are equal to your Total Revenue (TR). Total Revenue is found by multiplying the SP by the number of units sold. In this case we will use the avgerage volume of sales, since that is a realistic number. Let’s say you determine that the average volume of sales for your product is 2,000 units per 2 months.

your BEQ => FC+(VC/Unit)= Selling Price/Unit => $10,000 + 5(U) = SP(U)

After a little algebra, this gives us a break Even Quantity of 2,000 units. So, it looks like we can break even in this business in 2 months.

But, you need money to live on too, lets say you know you will need $25,000 over the next 6 months. So, let’s add in a $25,000 Profit Goal (PG). How do we determine how many units to sell now?

Well, first we ned to determine your contribution. Contribution is found by subtracting the variable cost per unit from the selling price per uinit. SP-VC=Contribution => $10-$5 = $5 Contribution.

Now that we have the contribution, we can find your Adjusted Break Even Quantity.

(FC+PG)/Contribution = Adjusted BEQ => ($10,000+$25,000)/5 = 7,000 Units.

Can you sell 7,000 units in 6 moths based on your market research?

I hope you enjoyed this post and found it useful, if you have any comments or questions please post them and I will be glad to help.