Revenue forecasting, what is it?
Forecasting revenue is the process of estimating future sales.
What is break-even and why is it important?
The value of sales required to cover both:
- Fixed (Rent, Insurance etc.)
- Variable costs (Food, Beverage, Staff etc)
Once understood it helps to guide decisions such as how many staff to hire, how much stock to purchase and how big a venue to commit to. Once achieved your business will be funding itself and once exceeded generating a profit.
Calculating Break even
With any forecast the results are only ever as good as the information included. It is important that you use actual costs where possible or as accurate an estimate as you can obtain.
Step 1 – identify or estimate your fixed costs of doing business. This includes items such as rent, insurance, internet and subscriptions.
Step 2 – identify and estimate your variable costs (cost of sales) and cost percentages. These are the costs that change based on sales levels and include items such as food costs, beverage costs, staff costs and merchant fees. For direct cost of sales such as food or beverage we need to calculate the cost percentage. This is the percentage of cost to every $1 of revenue.
Eg, a hamburger sold for $10 and has ingredients that costs $4. The costs of sales percentage is 40% ($4/$10 = 40%).
Industry benchmarks can be used if actual costs are unavailable. The table below displays the ATO benchmarks.
Step 3 – calculate your break-even revenue target. We recommend breaking down break-even into weekly targets.
Example
Now what?
Now that you understand your breakeven this can be used as a basis to measure performance. This requires periodic review to ensure that your actual performance is in line with you plan. Where differences are identified you can then make incremental changes to bring your performance in line or adjust your plan.
At Ten X we are committed to supporting our clients to improve their profitability. By understanding the financial aspects of your business we’re confident you’ll feel more in control of your business success.