Small Business Advice: Determine Your Profit before You Sell
A Home Business Article Contributed by Abe Gardea
Small Business Advice: Determine Your Profit before You Sell
If you're looking for small business advice before you take the leap into a new venture, perhaps the best advice is this: don't make even one sale until you have determined your break-even point on your new products or services. What exactly is a break-even point? In short, it's the difference between success and failure. Too many businesses jump in before calculating exactly how much money they will need to make it as a small business, and oftentimes, that is the downfall.
They find themselves working endless hours for little profit. Dont' let this happen to you. Follow the steps carefully below to determine what you need to charge in order to succeed as a business.
Small Business Advice: Organize your products and services
Your first step in a break-even analysis is to arrange your products in order; beginning with the lead or main product and then in order of potential sales. For example, if you have decided to market vacuum cleaners and cleaning products, your first product on the list would probably be the vacuum cleaners because they would offer the highest profit potential.
Small Business Advice: Calculate the sales price
Your next step is to calculate the average sales price of each product or service. To do this add your total sales for a period of time, and then divide by the number of products sold. For instance, let's say that you had (or plan to) sold $30,000 in your first quarter, which included 100 vacuum cleaners. That means your average sales price per unit is $300. If you haven't yet sold any products, you'll need to do an estimate.
Small Business Advice: Calculate the costs per unit
Next, you need to know how much you pay for each unit, and in order to determine this you'll need to figure the costs for purchasing or manufacturing. For example, if you are calculating the costs on your vacuum cleaners and your net price is $100, then that's the figure you'll use for this calculation.
Small Business Advice: Determine the total unit costs
Now, you'll need to take your cost per unit and come up with an overall cost. Using our vacuum cleansers as an example again, we need to take the 100 units that we've sold and multiply that by the $100 per unit cost. That means we've paid $10,000 for the products.
Small Business Advice: Figure your other costs
Wait, selling a product is more than just buying it. Also included are those expenses that it takes to sell the product. For instance, let's imagine that we paid $12 per vacuum cleaner to have it shipped from the manufacturer, and another $2.00 in advertising expenses for each unit. We would need to add $14 to each unit to get a true picture of the cost. That brings our net cost of each unit to $114, and our costs for all 100 units to $11,400.
Small Business Advice: Determine your profit
Okay, so now you know how much each unit costs and what you sell it for, now we have to determine whether or not the profit margin is acceptable. For each vacuum cleaner, if we take the sales price of $300 and deduct our expenses of $114, that means we earn $186 on each unit. We've sold 100 units, which means our profit was $18,600 overall.
Now, your job is to determine whether or not your profit is enough to justify the time and effort you put into sales. Do this for each product, and you just may find that you need to drop some of your products, or increase the price.
