P1: OTA/XYZ P2: ABC
c16 JWBT144/Gordon September 25, 2009 17:46 Printer Name: Courier Westford, Westford, MA
Project Your Growth and Profitability
actually earns from operations. It is interesting to see the big picture emerg-
ing. Successful entrepreneurs are able to find the balance between keeping
total operating costs and cost of goods sold to an effective minimum while
maximizing sales revenue. Do not accept negative Profit from Operations!
Are you wondering what the difference is between the income statement
and the cash flow statement? The income statement measures whether your
company is profitable or unprofitable by comparing all revenue streams to
all expenses. At the end of the year, for example, not all money has actually
been received or paid. Depending on the accounting method used, these are
embedded in the income statement and the balance sheet. However, the cash
flow statement will not include these items because they have not actually been
paid or received. Also, money that you have borrowed from lenders or received
from investors will not be accounted for in profit from operations because they
do not relate to revenue streams or expenses from the actual operation of your
business. They will, however, show up in the cash flow statement.
Breakeven Analysis
Breakeven is simple to calculate, yet crucial in its ability to yield a measurable
target of profitability. As you are running your business, revenue will be
flowing in because of your selling activities, and money will be flowing
out to cover expenses. At what point has your business become profitable?
Breakeven is the exact revenue point where sales cover all costs, i.e., the
sum of total overhead/operating costs (TOC) + cost of goods sold (COGS).
No loss—No gain.
Once you hit the breakeven point, the next dollar of sales results in a
profitable contribution to your company. At that point, it is time to pop
the cork. You have succeeded! The next equation lets you define this point
quantitatively:
Total operating cost
Breakeven sales =
Gross profit margin
Total revenues
Let’s assume that in the start-up of Bookstore Caf
´
e (Exhibit 16.4), the
annual total operating costs were $90,000, the annual gross profit margin was
$153,000, and the total revenues were $378,000:
Annual breakeven sales =
$90,000
$153,000
$378,000
= $225,000
169
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