Accounting For Dummies®, 4th Edition

9.7. Closing with a Boozy Example

Several years ago, some friends pooled their capital and opened a liquor store in a rapidly growing area. In their estimation, the business had a lot of promise. They didn't come to me for advice, but if they had I would have told them one thing to do during their planning stage — in addition to location analysis and competition analysis, of course. I would have recommended that they run some critical numbers through a basic profit model in order to estimate the annual sales revenue they would need to break even. Of course, they want to do better than break even, but the break-even sales level is a key point of reference.

Starting up any business involves making commitments to a lot of fixed expenses. Leases are signed, equipment is purchased, people are hired, and so on. All this puts a heavy fixed cost burden on a new business. The business needs to make sales and generate margin from the sales that is enough to cover its fixed expenses before it can break into the profit column. So, the first step I would have suggested is that they estimate their fixed expenses for the first year. Next, they should have estimated their profit margin on sales. Here there is a slight problem, but one that is not too difficult to deal with.

During their open house for the new store, I noticed the very large number of different beers, wines, and spirits available for sale — to say nothing of the different sizes and types of containers many products come in. Quite ...