Segment 7 SALES PRICES, NET PROFIT and BREAK-EVEN ANALYSIS
In this Segment, let's first look at 'Sales or Selling Price'. What is the amount of money that the business owner will sell the product or service? Questions surround: "Will it be too much, not enough, how does the price compare with competitors' prices, what is the suggested retail. Buyers are always looking for a bargain. Buyers are also more informed. Buyers shop around and have a relatively good idea what the item is worth. Price is important, but that is not the only factor in buying.
A key to a successful business owner is the knowledge of what the product or service is worth, how it compares to its competitors and how many buyers are needed. The business must sell enough products / services to meet their expenses and stay in business by keeping the selling prices within reason. Having the lowest prices does not necessarily bring buyers to the business. For the business owner, it means that the number of items sold must meet the monthly expenses.
Successful businesses maintain sales goals on a monthly and sometimes weekly basis. How they arrive at goals is based on the number of sales it takes to meet all expenses plus additional amounts for profit.
If a business has multiple products and varying prices, averages of sale prices need to be established. A shoe store with multiple price ranges of different shoes would average out all of the sales on every customer who purchases during a period of time. Basically the sales goal would be the number of customers' times the average amount spent which equals the expenses on a monthly basis.
A computer programmer who charges per hour may have (5) five or (6) six customers with different lengths of time. Basically, the Selling goal would be the number of hours times the rate that equals expenses on a monthly basis. It would not be based on how many customers.
The selling price of the product or service must be reasonable and attainable on a monthly basis, but it is not the price but the number of times it is sold each month. Lowering the selling price to get a competitive edge may be good for business and good for customers, but that business will have to increase in number of sales in the same time period to meet their expenses
Another key factor for establishing the selling price is the replacement cost and related costs of the product sold.....or the adequate amount of time needed in providing the service. This is the COST of GOODS. Replacement of products or time needed to complete the service is based on many factors and a very careful watchful eye should be on all costs associated with replacing the item sold. In service work, discussion in Segment 8 will be on Time Management which is one of the most important aspects for a business. In Segment 6, discussion was on COST of GOODS and all of its related Costs.
With these key points in mind, the selling price must be competitive, must be affordable by the buyers, must be of quality, must be perceived as worth the amount of the product and there must be enough sales in a given period of time, such as a month to insure all expenses are paid and an extra amount
Net profit is not to be confused with Gross Profit. Gross profit is calculated as the amount of monies received in selling product and services in a month less the Cost of Goods. Business Expenses are subtracted from the gross profit and not the sales of a product to determine net profit.
The Net Profit of a business starts with the Selling Prices of a product or service and how many sales must be made in a month's time to cover all of the expenses generated by the business. If the business does not make the needed sales that meet all of the expenses, (accounts receivables are not considered sales until payment is made,) another way will be need to pay. The formula is simple: Number of Sales times the price of each sale = the total cost of the expenses.
That is also, in simple terms, a Break-Even Point. Break-Even Analysis is determining how many sales of items must occur to meet all of the expenses given additional set of circumstances which will be discussed in a minute. Once all expenses have been paid and there is money left over, these monies can then be considered net profit. If there is not enough money available to cover the expenses, then there would be a Net Loss.
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How to Work Out Your Business Break Even Pointby JohnyBookerLive1,824 views
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