Just because you own a business doesn’t mean you have a profitable one. To find out if your company is bleeding red ink or is set up for success, you’ll want to conduct the following analyses.
- Review Fixed Costs
Also known as overhead, these are the costs you can expect to be the same month to month. They are, thus, a relatively consistent part of your budget. Examples include rent and utilities. It is often a good idea to be prepared to pay a tad more than these fixed costs just in case the utilities are particularly high that month.
- Sales Revenue
This is the money you bring in from sales every week, month, quarter, or year. While your fixed costs should be determined before you get started, you’ll probably need a bit of time to see how your company is doing and how many sales you’re making before you can calculate this.
- Average Gross Profit Per Sale
This is the average profit you have left overpaying for the direct costs associated with it. For example, if you sell clothes for $30 and the materials and packaging you require to make and ship them costs $25, your gross profit per sale is $5.
- Average Gross Profit Percentage
This is the percentage of your income you can expect to be profitable. Divide your average gross profit per sale by the price for which you sell your product.
Breaking Even
Once you have done all of that, you’ll know how much money you need to make and how much of it has to be a profit for your company to be profitable.
If you perform this analysis and find that your company can’t even break even, you’ll need to make some changes, including:
- Find less expensive supplies
- Cut employee costs
- Try a lower-cost workplace (or working out of your home)
- Charge higher prices to make up the deficit
Doing all of this can help you determine if your idea is fiscally feasible and, if not, how you can make it so.