Profit Growth Strategies By Brian Tracy

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1 Profit Growth Strategies By Brian Tracy Determine Your Break-Even Point Introduction Nature cannot be tricked or cheated. She will give up to you the object of your struggles only after you have paid her price. (Napoleon Hill) Successful entrepreneurs are those who think better and more successfully than unsuccessful entrepreneurs. One of the most important tools that you can use to make better business decisions is a break-even analysis, on every product or service that you offer. Many entrepreneurs make the mistake of bringing a product or service to the market without fully understanding the total costs and the prices that they can charge. As a result, they find that they cannot sell enough of the product or service to make a profit, based on the current market. In this lesson you will learn how to: Conduct a break-even analysis on each product and service Conduct a break-even analysis on your business Conduct a probability analysis for each investment Achieve profitability in your business 1

2 Conducting a Break-Even Analysis The first step for a successful entrepreneur in evaluating any product or service opportunity is to conduct a break-even analysis. This analysis enables the entrepreneur to determine with great accuracy whether or not this is a profitable business opportunity. 1. A break-even analysis is a simple way to determine how much of the product must be sold to generate a specific level of profitability. a) Each business has certain fixed costs that must be paid every month, whether or not any sales take place. b) Each product or service has variable costs that are incurred when the product is produced and sold. c) There are semi-variable costs that go up or down depending on the level of business activity. d) After all costs attributable to bringing that product to market are deducted, each product or service yields a certain amount of profit (or loss). e) The profit contribution can then be divided into the fixed costs to determine how many units must be sold to break-even. 2. Here is an example of a simple break-even model for a simple company. a) The total costs of operating the company each month are $10,000. b) Each product the company produces can be sold for $1,000. c) Each product costs an average of $800 per unit to produce, sell and deliver. d) The profit contribution per unit is therefore $200 each. 2

3 e) $200 is divided into $10,000 to determine the break-even point. f) $10,000 divided by $200 equals 50 units. g) The company must therefore sell 50 units per month to break-even, or approximately two units per business day. h) Only after the company has sold 50 units in a month does it begin to earn a profit of $200 per unit. 3. Conducting an accurate break-even analysis requires a careful examination and study of costs and prices in your business. a) You must know exactly what your product or service costs in total to deliver to the final customer. b) You must know exactly what price you can charge for the product or service. c) You must include and deduct all miscellaneous expenses involved in operating your business. 4. You should conduct a business opportunity analysis on any product or service you are thinking about producing and selling. a) Determine the amount that you can sell each month and each year of the product or service. b) Determine the prices that you can charge per unit. c) Determine the gross revenues that you can earn from each sale. d) Determine the net revenues that you can earn from sales (the gross sales price less all the costs of making the sale). 3

4 e) Determine the total profit that is possible at the projected level of sales. f) Determine the percentage of probability of achieving those financial goals. For example, is there a 50% probability? An 80% probability? (There is never a 100% probability of hitting a business target.) g) Multiply the percentage of probability times the estimated profit. (For example, if you anticipate a $100,000 profit over one year from an investment, and you believe that there is an 80% probability of achieving this number, the actual profit number you would use would be $80,000.) h) Determine the total investment that you will have to make to achieve this amount of profit. i) Determine the return on investment that you will receive based on your calculations. j) Compare this result against all other opportunities you have to invest the same amount of money. (Including leaving the money in the bank earning interest.) 5. Analyze every product or service that you produce and sell on a regular basis. a) Make a list of every product or service you sell, starting from the largest volume seller. b) Calculate the average sales price of each unit. c) Calculate the total cost of each unit. d) Calculate the net profit that you earn on the sale of each unit. e) Calculate the cost of the investment to produce and sell each unit. f) Determine the percentage of return/profit that you earn from the sale of each unit. 4

5 6. Organize each of your products and services by priority, in terms of their contribution to profitability. a) Determine your single most profitable product or service. b) Determine the volume of sales of each product. c) Determine the total profit per unit of each product sold, after deducting every direct and indirect expense. d) Determine the total profit contribution to the company of each product. e) Conduct this analysis on each of your important products or services. 7. Apply the 80/20 principle to this profit analysis. a) 20% of your products or services will contribute 80% of your profits. b) 80% of your products or services will only contribute 20% of your profit. c) Dedicate more of your time and resources to selling more of your most profitable products and services. Before you consider offering a product or service, you should conduct a break-even analysis on it for your business. You then compare the results of this analysis against any other products or services that you could offer. Many entrepreneurs decide to discontinue a product or service completely after conducting this analysis. They immediately see that it would be better for them to invest their time and money in producing and selling something else. As market conditions change, and consumer desires evolve, you may find that a product or service that was popular and profitable is no longer successful. It will then be time for you to begin offering a product or service that is easier to sell, at a higher price, yielding a better profit. 5

6 Action Exercises 1. What are your three most popular products or services? 2. What are your three most profitable products or services, based on net profit contribution? 3. Who are your most profitable customers, the ones who buy the most at the lowest cost? 6

7 4. What products or services would you not bring to the market again today, based on your experience with producing and selling them? 5. What are the 20% of your products or services that contribute 80% of your net profits? 6. What are your least profitable products or services? 7

8 7. What are your three best business opportunities right now? (Before you spend any money on them, conduct an opportunity analysis and tentative break-even analysis of them.) What one action are you going to take immediately as the result of your answers to the above questions? 8