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    Business Ratios

    By the time you have your financial forecast complete, you have numbers available to do some standard business ratios. I can’t say that I’m a big fan of ratios, but they can look good in a full and formal business plan, even though they are projected ratios. Here’s an example.

    The real use of ratios, in my opinion, is watching them as they change over time. In the best of the plan-as-you-go business planning idea, you have some key ratios that are important to you. They are in your objectives and you review them in meetings.

    Notice in this case that I’ve also added a reference to standard business ratios. This is a good touch in a business plan. They come from available industry data, which I discuss in the next section. Don’t expect your company projections to ever be an exact match. Be prepared to explain why they are different. And they are always different.


    Break-Even Analysis

    The break-even analysis is not my favorite analysis for a business plan. It has lots of problems. First, people often confuse it with payback period, meaning when do you break even on the money spent with money returned to you from a business, as it grows. That’s not break-even. Second, it depends on being able to deal with estimated average numbers that are hard to do. Businesses rarely produce an average revenue per unit, or an average variable cost per revenue unit, or average fixed costs.

    Still, it is useful if you take it with a grain of salt. It can help you see the implications of fixed vs. variable costs, and it can give you a basic idea of how much you need to sell to cover costs. If you don’t expect it to be too exact and you don’t put too much stock in it, then it can make sense and be useful.

    I have an example here. The standard break-even financial formulas are:

    The units break-even point is:

    Fixed Cost ÷ Unit Price – Unit Variable Costs

    The sales break-even point is: The sales break-even point is:

    Fixed Cost ÷ (1-(Unit variable Costs/Unit Price))

    This section of the model calculates technical break-even points, based on the assumptions for unit prices, variable costs, and fixed costs.

    The break-even analysis depends on assumptions for fixed costs, unit price, and unit variable costs. These are rarely exact assumptions. This is not a true picture of fixed costs by any means, but is quite useful for determining a break-even point.

    People often represent break-even a line chart, showing the break-even point as the point at which the line crosses zero as sales increase. The example here shows a break-even analysis that compares unit sales to profits, and assumes:

    Fixed costs of $94,035

    Average per-unit revenue of $325

    Average per-unit variable cost of $248