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Home > How to Choose a Home Based Business > The Break-even Analysis for a Home Business

The Break-even Analysis for a Home Business

Many years ago, before I ever opened a business of my own, and I have had a few since then, I decided that I should go commercial with my cheesecake and distribute it to individuals and restaurants within driving distance of my home. My financial advisor, my husband who is a CPA, showed me how to do a simple break-even analysis to determine the point at which my labor would begin to be rewarded.

Well, I sat down with my columns and my estimates. I had one column of fixed costs, such as the cost of a good range with a large oven, the energy costs to run the oven for a set

 
number of hours per day, a delivery van, the equipment for making and shipping each cheese cake and so on, ad infinitum, it seemed.

There were of course, the so-called sunken costs of the kitchen big enough to carry on such activities, water from the well, and those things which had already been bought for other reasons, but which would now be used for business purposes. They are still costs, but I did not list them. However, any business owner has to be aware that those costs are still involved in the equation because they represent assets that would be used in another way if the business were not operating.

The variable costs had to be estimated, because I had to assume a certain number of cheesecakes had to be made and distributed for the business to be worth doing.

 

 

So I listed and summarized all the estimated expenses such as flour, cheese, sugar, butter, in other words all those things that would vary with the amount of production. Such things as the amount of gas that would be burned depending on the number of orders I delievered also had to be part of the analysis.

Now I had my total figure; let us say that the daily average cost of a cheesecake business that produced 20 cakes a day was approximately $450 --- and as I remember it, it was just about that figure. Remember to count such things as professional liability insurance, extra car insurance for delivery vehicles, etc.

Well, all things considered, that meant I had to either make a lot of cheesecakes or charge a lot for each one of a few cheesecakes. So unless I could charge over $20 for a custom-baked and hand-delivered cheese cake -- and do that 20 times a day every business day, the business would not only not make any money, it would not even pay for itself, much less my time and labor.

Another calculation I had to consider in this of course, was my own available time and energy. To make and deliver 20 cheesecakes per day, I needed to work about 19 - 20 hours per day! That was just to break even. Hmmmmmm, time to re-think.

Okay, so how about hiring someone to do the delivery? Other costs must be added. Hourly pay, benefits, insurance and my own time in training and supervising an employee become part of the analysis. Well, in my part of the country, the costs listed on the neatly ruled accounting paper simply shot skyward.

I sighed and decided to open a different kind of service business. No cheesecake slave me!

This break-even analysis is something that every person who is considering going into business should do. I know that, on inspiration, some people are simply able to “catch a wave” doing something they love and they are lucky.  Their businesses become the Model-T or the Bell Telephone of history.

But for each Henry Ford and Alexander Graham Bell there are so many cheesecake
bakers that opened a business only to go out of business, because they never counted the costs.

Author: Ann Garner

Home > How to Choose a Home Based Business > The Break-even Analysis for a Home Business

 

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