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Holding Your Breath: Break even analysis

Breakeven analysis is something everyone should get a grip on in their business. Knowing how long you need to work; how many units/subscribers/commitments you need before your head gets above the waterline is essential to good business.

A few years ago I was involved in an enterprise where we needed to sell 16 units before we’d break even on the initial investment. The sales cycle was extremely long, if not completely unpredictable. The result was that we were racing the clock – spending money faster than we were earning it and break even meant selling far more than was in our pipeline and could be expected to come through. Needless to say, this enterprise – and it’s business model – are no longer around.

Another example is a simple service model. I consulted with a group of well-meaning people. They told me their price point, their market and the kind of salaries and expenses they were anticipating with their startup. I ran a quick calculation and told them that to meet their revenue expectations they’d need to sell to 115% of the market. What’s worse – they’d need to do that every year, year after year.

That may seem exceedingly naive – and on some level it is. More than anything, though, it’s typical. Very few people run the numbers on their business model and look at how they plan to break even. Much less how to reach past that amount to positive revenues. This refusal to face the music results in legions of anemic businesses that are barely getting by or simply survive on credit, investor cash, or by sacrificing their lives in the hopes that the math will one day work out. It won’t. It’s math. It always works the same way.

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