Starting a business: How soon will my business become profitable?
Announcement posted by BudgetOne 21 Jul 2016
So you’re thinking of starting a business? Better get cooking on that break-even analysis, right? Well – Yes and no.
Well – Yes and no.
While knowing exactly how many units you need to sell to cover fixed & variable costs and recover your investment is valuable information, your traditional breakeven analysis leaves much to be desired for.
True predictive power lies in the preparation of a Start-Up Budget and in this post you’ll discover why.
Breakeven Analyses Are Too Simplistic for the Complexity of Starting a Business
The breakeven analysis relies on two facts that are rarely true in business:
1. The company plans to offer a single product/service.
2. Unit price & cost will be fixed over the duration of the breakeven period.
Throw multiple product lines, promotions or price fluctuations into the mix and the analysis falls apart – at best leaving you with a rough estimate.
Demand & Competition are Ignored
Predicted sales figures must be taken with a grain of salt when they are generated under the assumption that the market “definitely” desires your product. Only a Start-Up Budget takes into account actual demand for your offerings and a robust competitive analysis. Studying current competitors and conducting a risk-analysis for further participants entering your market are vital steps towards assessing long-term viability.
In addition, price fluctuations post launch will inversely affect demand and this detail is ignored in a breakeven analysis.
Misunderstandings Revolving around Fixed Costs
The notion of fixed & variable costs being entirely separable doesn’t fit within the true reality of operating a full-scale enterprise.
As output rises, fixed costs will increase, too.
True viability modelling is not a straight line angling across the X & Y axis and you need a Start-Up budget to hedge your bets against unreliable data.
What About Time & Cash-Flow Management?
Selling X units by Y date sounds great but what happens if you don’t hit your numbers by the deadline?
How long will your new enterprise have funds available to pay the bills, cover overhead and keep you afloat?
Excess Output, Overstock & Shrink
Presuming that sales = output is a dangerous fallacy. You need a budget to account for overproduction, wasted output, damaged goods and product lines that just won’t sell or need to be heavily discounted.
A Planning Aid and Not a Decision-Making Tool
Conducting a breakeven analysis can be an excellent source of knowledge and insight into potential pitfalls facing your business. However, in the real world this simple calculation can send misleading signals (both positive & negative).
Investing in proper viability modelling through the use of a Start-Up Budget is best practice for determining whether or not a proposed venture should be launched.
Before starting a business and bet on your house, call us today on 0429 142 413 to discuss your business idea and let us challenge your thinking so you possess a plan that will save your house, relationship and succeed.
Taso Tounis is a strategic business planning, cash flow management and budgeting consultant. He is passionate about helping you leverage from insightful reporting and become better informed on the position of your business so you can make decisions that lead to success.
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