How to Calculate Minimum Income for Business Survival?

I hope this will be useful to entrepreneurs who are bad in Financial accounting, just like me.

When projecting the business survival, you should know the minimum amount of income you should make and based on that you define the minimum number of production, sales. If you know your minimum then it will help you on making deals, negotiating with customers, pushing your employees and exploring your market.

If you know your minimum, then that will help you set your product price, define your prospective profit and make the future budgets for expansion and other things. Today, I will show you how to calculate the minimums that is required to pay all your bills.

In financial terms its called break-even analysis (BEA). Break-even calculation is the first step in all kinds of business feasibility study and business planing. If you know the Break-even, you will then be able to estimate sales targets and make the rational marketing/promotional activities to achieve those targets.

Follow the steps:

1. Make a list of all fixed expenses

Fixed expenses includes all the expenses that you must pay regardless of whether you make any sales or not. The cost is not affected by any changes in sales or productions until you decide to expand or shrink your business. Fixes expenses include office space rent, electricity, salary of employees, phone/Internet, membership subscription fees, bank loan payments, etc.

2. Variable costs percentage

Variable cost includes expenses that changes as the change in sales and includes the cost of goods sold, marketing and sales commissions, production costs, credit card fees, part-time employee costs etc.

For example:
Cost of Goods Sold - 40%
Commissions - 10%
Production cost - 10%

Total Variable Cost Percentage - 60%

3. Now calculate

If your fixed costs are $4000 per month and your variable costs are 60%, break-even is calculated
as follows:
Contribution margin = 1 - variable cost% = 1 - 0.60 = 0.40

Break-even Amount = Fixed costs / Contribution margin
= $4000 / 0.40 = $10000

So $10000 is the minimum amount you must earn to survive.

If your target is to make a $1000 profit, add that amount to fixed costs: ($4000 + $1000) / 0.40
= $5000 / 0.40 = $12500

Changes in expenses or prices will have a substantial changes in the amount you should earn.

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