You have your business idea and the business plan to make it happen. You have accumulated all of your financial statements and support documents. What next?

A critical step now for small-business entrepreneurs looking for financing is to calculate their break-even point.

“Break-even” is the point at which you neither make nor lose money in producing a product or delivering a service. A break-even analysis is the process you use to uncover those numbers. It depends on the following variables:

• The variable production costs for a product.
• The fixed production costs for a product.
• The product’s unit price.
• The product’s projected sales.

To begin, you’ll need to calculate as best you can all fixed costs and determine what your variable costs are at projected production volumes.

Fixed costs, sometimes referred to as overhead, are expenses that don’t vary according to production amounts — such as rent for office space and storage space if you store inventory; office equipment, like telephones, faxes and computers; insurance; and utilities.

Variable costs are expenses that do vary with the amount of service provided or goods produced. They include such costs as hourly pay for your employees and raw materials.

Some variable costs don’t depend specifically on the number of products produced but are still variable, such as advertising or promotion expenses.

There are formulas to determine break-even dollars — the amount of revenue needed to cover both fixed and variable costs. You can access a user-friendly calculator online at www.bplans.com/business_calculators/breakevencalculatorwindow.cfm

Here’s an example: You are planning to open a sandwich shop. 

The variable production cost for making one sandwich is $2.

The fixed production cost of making sandwiches for 18 months will be a total of $150,000.

The unit price you are projecting for the sandwich is $4.99. That is your best estimate of what the average consumer will pay for your sandwich. 

You have done your research about market potential and, therefore, forecasted sales are 150 sandwiches a day, six days a week, or 70,200 sandwiches in 18 months. 

When you plug those numbers into the calculator, the result indicates your business will break even in the 55th week of business, or just past your one-year anniversary.

Are you worthy of financing if your calculations say that you’ll be unprofitable for a year or more?  In order for lenders to have the peace of mind needed to finance your business, they will look closely at the amount of your working capital available to tide you through until you do make a profit.

Working capital measures how much in liquid assets you have available to build your business or to sustain it until you reach break-even.

Also, lenders may ask for collateral, which is essentially a back-up system. Both business and personal assets can be sources of collateral.

For sandwich shop owners and other entrepreneurs, a well-calculated break-even analysis is not just a bunch of bologna. It is a key tool in your business projections and in satisfying the needs of your lender.

Jeff York is president and chief executive officer of CoastHills Federal Credit Union. He has 25 years experience in the financial services industry, 23 with credit unions, and has worked at CoastHills for four years. He can be reached at jeff.york@coasthills.coop or 733-7600.