Generally speaking, the value of a business is based on its future profit potential.
The pre-seed funding stage commences with your idea for a new business, and with initial funding for the entrepreneur to progress a working prototype or minimum viable product. The objective of this phase is to achieve the break-even point, that is, the point where a business starts to make a profit. It is important, then, for you to
- know how to calculate the break-even point, and
- consider how long it might take to achieve this milestone for your planning.
- Break-even point
- The break-even point is the production or operational level at which total revenue is equal to total expenses. In other words, you do not make a profit or a loss, but you break even.
- Fixed Costs
- These are expenses that are not dependent on the amount of goods or services produced by the business. Examples include rent and insurance.
- Variable Costs
- These are costs that are volume-related (such as the cost of raw materials), and are paid per quantity or unit produced.
Read the following section of the Introduction to Business course published by Lumen Learning:
Tasks
Using the outputs from the financial statements learning challenge:
- Estimate the break-even point for your start-up business, i.e how many units or services you will need to sell to break even.
- Estimate how long it will take for your start-up to break even.
In your learning journal blog, write a short reflection (200-250 words) on what you have learned about the break-even point, and why it is important for entrepreneurs to consider. For example, what is the main purpose of conducting a break-even analysis? What would happen to your break-even point if your fixed costs were to increase?
- Remember to tag or label your post using the course code: IENT103 (This is needed to harvest a link to your blog post in the course feed.)
