The Break Even Point is one of the most key pieces of financial analysis that small business owners like Jose and Diana can undertake when writing out the business plan for a small business like Home At Last Realty. This analysis tells the owners just how many homes they have to sell in order to cover the fixed costs faced by the business. This analysis tells the business owner how much they need to sell in order to stay alive and stay
In our analysis, where we are calculating the break even point in terms of homes sold, we take in the operating expenses for the first year of 2012 which are projected to be at $347k and allocate approximately $70k of those costs to being fixed and the other to be variable. Gross margins for a business like real estate financing will be 100% since there is no cost of goods sold for this business. Interest expenses are also added to the operating expenses.
Once we input these parameters into the break even analysis template we find that for each sales of $30,000, we are looking at a gross profit of $30,000 which of course is 100% of the sale price given that there is no cost of goods sold. When dividing the adjusted operating expenses of $70kk by the $30,000 of gross profit per unit of sale we come up with a break even number of 3 homes that have to be sold by Home At Last Realty to stay in business.
It is important to understand that selling those 3 homes would cover the costs of basic operations including making salary payments to the administrative staff but it would not allow either of the partners to take back any income for themselves. Further the owners need to understand that if these homes are sold by any or their real estate agents, then the agents will have to be paid the commission that they have been promised resulting in a higher operating expense. It would be unwise to assume that a going concern can survive on selling just three homes but this analysis serves to create an absolute baseline for planning purposes.
We have projected in that in our first year of operations, even given a slow growth environment we will be selling at least 9 homes. Thus we feel extremely confident that we will be able to meet out break even costs by selling enough homes in the first year of operations. One of the reasons that we are able to maintain such a low adjusted operating expense cost structure is that intend to hire only one administrative staff in our first year in business. This of course greatly reduces the amount of overhead and expenses that we would have to face. Since both Jose and Dinah are the owners and primary realtors, they can also have much greater control over their own salaries. Clearly if the market is not doing well and the business environment is very slow, they will both choose to forgo a part of most of their salaries. Compensation is the largest operating expense in a real estate business and if the owners can control that, and rely on their own savings for the first couple of years, we feel that the business has a very good chance of succeeding as per the projections of this business plan.
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