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2/9/07

Business Plan Formation Part 8

The third and final vital document to have in your financial plan is the Break Even Analysis. The Break Even Analysis is the document that shows your potential investors the minimum amount of sales necessary to have your company break even. Therefore, this “break even amount” will create no profit, but will mean you have no losses either. The point of this document is to help the potential investor analyze the viability of your Pro-Forma and your Start-Up costs. Remember, reaching the break-even point is NOT your goal! The break-even point should be your floor.

The following is an example of a very basic Break-Even Analysis. This document is ONLY an EXAMPLE!

As I mentioned, this document will be used to determine the viability of your other financial documents. You will also want to analyze this document. You may be surprised by the results. This document could help you adjust your product’s price, your business costs, and/or your ideal revenue per available seat hour (for restaurants). It is important to remember to keep your Marketing Plan and Market Analysis in mind if you decide to adjust your product price. It is very easy to increase your product price on paper; however, your market has to be able to tolerate your increase. Do NOT arbitrarily raise the price of your product to make your break-even point “easier” to reach!

On a side note, I was asked whether to include a Sales Forecast in a business plan. A Sales Forecast is a document that shows the amount of sales you speculate you will make during a given time period. If you want to include this document in your business plan, that is a format issue that is yours to make. Note that the Pro-Forma and Market Analysis will include all the information that the Sales Forecast will. The Pro-Forma is a speculation of your monthly/weekly profit and therefore will include your sales. The Market Analysis will include your research about the market you are trying to penetrate and will therefore be the basis for determining your Pro-Forma amounts. A Sales Forecast may be able to more easily tie these two documents together, but it not absolutely vital in your business plan construction. In my opinion, I would include a Sales Forecast in the Market Analysis section. This way you can create a logical progression between the market statistics and you sales projections. However, as I stated before, I am giving you a general formation plan. You can absolutely include additional documents that you feel will make your plan more clear or easier to understand. I have but one caveat to give you; do NOT consistently include documents that create redundancies in your business plan. Saying the same thing five different ways has the possibility of upsetting the potential investor and of chipping away your credibility.

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