One of the measures used by all businesses and investors is the length of time it will take a fledgling business to break even from its original investment. The daily break even point for most businesses is viewed on a daily basis, considering the amount of income generated against the cost of doing business for that day.
However, for long term planning it will be necessary to forecast projected earnings against anticipated expenses to determine when it is the business will start realizing a sold profit. Many businesses will start their business plan by determining how much money they will need to get the business started, adding to the amount expected to be needed for continuing operations over at least a five year period.
They can then realistically forecast their income from sales and any other source on a daily, monthly and annual basis. This forward looking planning usually is done conservatively with a few hiccups built into the plan as a contingency for problems. Many businesses during their first year or two often exceed earnings expectations due to anticipated problems not arising and the profit being higher than initially anticipated.
However, this may not move up their break even point, especially if something comes up in the next few years that was not planned. Most business owners agree that in the first five years, ups and downs will usually level out, bringing their five year plan to fruition. In virtually any business plan, there is one variable that can make or break a business and that is the income from sales.
Too many times a business owner will set lofty, often unrealistic sales expectations and base their entire expense structure and payback time on that goal. When sales fail to materialize in the projected amount and expenses have to be cut, it will negatively affect all of the other aspects of their plan.
Calculating sales and income conservatively may appear to some to be unsure about their products or their sales ability while others believe that setting high goals is the way to attract investors as well as additional business. However, it is always better in the business world to exceed expectations than to consistently fall short. When expenses have been cut to the bare bone, there are only two ways to meet your end goal.
One is to find new ways to increase sales without increasing expenses and the other is to close up shop. One of the things people need to remember about business plans is that they are written on paper and not etched in stone. There is no harm in making adjustments to the plan as the business ages and unless the changes affect the five or ten year plan of the business. Most investors and other stakeholders in the business can appropriately analyze the needed changes and accept them.
One thing needed to help the business reach its break even point is complete honesty with everyone associated with the business including customers and clients, investors and those who depend on the business for their income. Letting everyone involved know what is happening on a daily basis is the best way to retain loyalty and confidence in the business owner.
Obinna Heche. Los Angeles – California
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