Essential Math for Start-ups


When you are an entrepreneur, it is important to keep on top of some very simple startup math to bolster your chances for success. This is as easy as maintaining basic calculations that break down your business’s upcoming goals and analyzing exactly what you need to do to break even.

When you are an entrepreneur, it is important to keep on top of some very simple startup math to bolster your chances for success. Why is it so important to do the math when you are starting up? One reason is that it allows you to clarify your goals in your head, which can help them seem more achievable and motivate you better than if you have nebulous goals without clear definition.

“Entrepreneurs often lack or lose motivation as their business progresses,” states Nathan Resnick, contributor to Entrepreneur.com. “By breaking down the numbers behind your business, you’ll realize your objectives are attainable.”

The first math that you need to calculate is the amount of services or products you need to sell in order to meet your monthly target sales. Divide your target by the price of your product/service and you will know roughly how many sales you need to meet your goal in the next month.

“Every entrepreneur needs to do this simple equation,” states Resnick. “Without it you are lost, with no path to attain your goal.”

If you sell only a few items of varying costs, this will be easy. If you run a more complicated business like a restaurant, for example, this won’t be so clear cut. In this case, you should think of a way that you can represent a basic unit of sales, such as the average amount that a family spends on dinner, and that will be your unit. When you make the calculation, you will be able to determine approximately how many times you need to host dinner guests at your restaurant to meet your goal.

Knowing how many dinners you need to sell each night can help you determine how many hours to stay open and even how many servers to keep on staff. The possible applications of this calculation are endless; it can even help you determine if your product or services are priced appropriately. If you need to make an unreasonable amount of sales to reach your goal, you either need to cut costs or raise the price of your product.

In order to determine your monthly goal, you should consider doing a break-even analysis, which will clarify your startup costs. A break-even analysis is useful for determining the point at which your business will be able to make a profit after it is able to cover all expenses on an ongoing basis. This will also help nail down a target revenue that you need to make to cover recurring business expenses.

In order to determine the fixed and variable costs that affect your business, you must understand what each means in regards to your business model.

Fixed costs are your overhead, the expenses that are always the same, regardless of the volume of business you do at a given time. Examples of fixed costs are employee salaries and rent. Variable costs depend upon how many sales you are doing and include things like  inventory, manufacturing costs and delivery costs.

Calculate your break-even point by using the following equation from the U.S. Small Business Administration: “Break-even point = fixed costs / (unit selling price – variable costs).”

With these calculations under your belt, you will be ready to set specific and achievable goals for your business’s immediate future.

 

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