Building a Profitable Venture

A better way of saying this might be, “Once you’ve gotten your business to a breakeven point, you are now positioned to start making money as you continue increasing sales and decreasing expenses”.

I have worked with many new product lines and business units. Invariably, timelines take longer than anticipated and costs come in higher than forecasted. It’s not that teams are intentionally low-balling their time and cost estimates. It’s that they don’t know what they don’t know.

New product lines and business units always lose money at first because of the planned and unplanned expenses needed to develop them. Therefore, the initial objective for all new ventures should be to increase sales to at least the breakeven point to stem the flow of cash out of the business.

Once this point is reached, an amazing thing begins to happen. All fixed costs are covered by the sales that have gotten us to the breakeven point. So, any sales above breakeven start producing a #NetIncome % of sales that starts to approach our #GrossMargin % of sales. Because of this, our overall net income increases more rapidly the further our sales move above the breakeven point.

To summarize, if you break even, you have positioned yourself to start making money. You’ve already paid for all of your #SG&A / #Overhead. There may be some incremental overhead expenses with sales above your breakeven point, but they should be minimal. Your net income % on these incremental sales should approach your gross margin %.

Here are some questions to ponder:

How should we price incremental sales opportunities that are above our breakeven point, acknowledging the fact that all fixed overhead expenses, in general, have already been paid for?

How can we reduce expenses and increase sales to move towards breaking even?
 

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