As an introduction if you've just landed on this page, this is part of a series of articles and images on how to calculate breakeven point analysis. Not sure what breakeven point is? Breakeven point analysis allows you to figure out the volume of sales your arts and crafts business needs to make in order to cover both your variable and fixed costs. At breakeven point, your arts and crafts business has made or lost no money.
The sample company I am using for this breakeven point analysis is Oak Desk Clocks, Inc. To get the whole scoop on the facts and circumstances for this business, go to the first page in the breakeven point analysis series of articles.
Breakeven Point Analysis Four Year Spread
The image on this page provides the entries for each of the cells on your arts and crafts business spreadsheet. Remember that the entries have to be done in specific columns and rows in order for the spreadsheet to work. Remember, you can click on the image to enlarge it.
In my example, Year 1 is in column B; Year 2 in column C; Year 3 in column D and Year 4 in column E. Use the following information to guide you to the proper rows: Clocks sold is in row 17; Gross Sales is in row 19; Cost of goods sold is in row 21; Gross profit is in row 24; Advertising is in row 26 and Net income is in row 30.
Explaining Basic Terminology
For this spreadsheet, Clocks Sold is your gross revenue figure. It's not figuring in any customer returns or discounts. Cost of goods sold includes all expenses that directly tie to hand crafting the arts and crafts items. In other words, it includes all your varible costs that go up and own based on volume. Variable costs include raw materials and contract labor (if you pay others to hand craft your items). Gross profit is the difference between revenue and cost of goods sold.
Reviewing the Cell Formulas
Looking over the cell formulas, you'll see three rows of particular importance: Row 17: Clocks Sold; Row 21 Cost of Goods Sold and Row 26 Advertising. These rows pull calculations from the basic assumptions in a more detailed manner than the other rows.
Rows 21 and 26 are set up to show the changes in activity from year 1 to year 4. Row 17, Clocks Sold, changes to reflect new costs. Sales volume has to increase (or decrease) to absorb any change in expense to make sure the bottom line is exactly zero.
Seeing Breakeven Point Results
After you enter all the cell formulas you'll see that the sales figures are quite high. In order to reach those sort of revenue figures, you will have to wholesale your arts and craft items.
However, I say reach for the stars with your arts and crafts business! I have quite a few arts and crafts clients whose revenue figures do approach a million dollars per year. Initially, it takes hard work, networking, in-depth marketing research and it's not something you can do part-time.
So, try out the formulas and on the next page, I'll show you how your spreadsheet should look. The good thing about this exercise is that once you get the spreadsheet set up, with a few modifications, you can easily tailor this to your own arts and crafts business by changing the initial assumptions.
Before I wrap up this series, I will also give you examples of how to add in owner payroll and suggestions on doing breakeven point analysis for individual items instead of for your entire business (as this spreadsheet represents.)