New business guide: Part 3 – Analyzing cost
New businesses are expensive. They will require a large cash injection, or a steady stream of funds to maintain operations. For most, it is a combination of both. You need to ask yourself; do you have the means to fund your startup, or will you need to borrow money? Will this be a side project, or will it become your sole income? All these finance questions need to be thought out carefully.
Many startups fail because they run out of money before turning a profit. Always overestimate the cost of items to give you a safety net. This will increase the odds of success. It may seem silly, but it always good practice to have more and not need it, than less when you do.
By performing a break-even analysis, you will determine the startup cost of your business. This is an essential element of financial planning and allow you to determine when or if you will become profitable.
- Fixed Costs ÷ (Average Price – Variable Costs) = Break-Even Point
This formula will allow you to determine the minimum performance your business must achieve to avoid losing money. It can then allow you to determine the level at which you need to hit to be profitable.
What can you learn from a breakeven analysis?
Ask yourself: Will my expenses be covered by revenues? Do all of my products or services turn a profit? Or are some sold at a loss?
- Pricing. Creating a pricing structure that details the values of your products is important. The dollar amount must be instantly comparable to the competition.
Ask yourself: Are they fixed or variable costs, what is the total? How much is your labor worth?
- Stock needs. How much do you need to sell to have your revenues at an appropriate level?
Ask yourself: How can I reduce cost? How can I improve sales?
Watch your expenses.
Do not overspend when starting a business. Make thoughtful purchases that add to the true value of your business, flashy items are expensive and are not a good idea at the start. Constantly monitor your expenses and adjust accordingly.
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