Break-Even Analysis: Will Your Business Make Money?


Some people have a bigger problem than
others when opening a new business.
These are folks who are positively enam-
ored with their business concept and
are desperately eager to begin. They are
so smitten and eager to start, they have
no patience with the economic realities
involved in their business. If you recognize this tendency in yourself, it’s extra
important that you prepare a financial
forecast carefully and pay attention to what
it tells you. This step tells you whether
your idea is a sure winner or a sure loser
or, like most ideas, whether it needs work
and polishing to make it presentable.
How can you tell if your business idea
will be profitable before you implement
it? The honest answer is, you can’t. This
essential fact makes business scary. It also
makes it adventurous. After all, if it were
a sure thing, everyone would go into
business.
Just because you can’t be sure you will
make money doesn’t mean you should
throw up your hands and ignore the
whole problem. You can and should make
some educated guesses. I like to call them
SWAGs (“Scientific,” Wild Ass Guesses).
The challenging part is to make your profit
estimate SWAGs as realistic as possible and
then make them come true.
The best way to make a SWAG about
your business profitability is to do a break-
even forecast. Although a break-even
analysis or forecast can never take the
place of a complete business plan, it can
help you decide if your idea is worth
pursuing.
Most financial backers expect you to
know how to apply break-even analyses to
your business. Your backer may ask what
your profits will be if sales are slightly
higher or lower than your forecast.
Many experienced entrepreneurs use a
break-even forecast as a primary screening
tool for new business ventures. They won’t
write a complete business plan unless their
break-even forecast shows that the sales
revenue they expect to obtain far exceeds
what they need just to pay all the bills.
Otherwise, they know their business will
not last very long.

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