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.
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.