When starting a business, or with one already running, the doubts that usually appear are:
- Am I making or losing money with it?
- How much do I need to sell so I don’t win or lose?
- Does it make sense to invest in an advertising campaign?
- Which one should you invest in?
- What decisions were made the right ones? And the wrong ones?
The first thing you have to know is that economic facts are measured and controlled with indicators. Some indicators are expressed as indicesand they arise from the division of one variable by another.
We can say that both the divisor and the dividend in an index can be flow variables or stock variables.
However, what we are looking for is to do a financial analysis of the company that provides the answers to the questions we raised above.
This economic diagnosis will allow knowing:
To identify the symptoms and develop a correct analysis, it is necessary to make a study of the economic structure.
Analysis of the economic structure
This analysis is done through Statement of income made up of some flow variables, which are characterized by being the accumulation of “something” (sales, expenses) during a specific period (a campaign, a month, a year).
We can divide the income statement into two parts:
- marginal contribution
- Expense table
marginal contribution
The marginal contribution arises from subtract variable costs from the sales amount without VAT. It is very important because it calculates the expenses that are generated by sales, regardless of the actions that are taken in the short term.
In an online store it is calculated as follows:
Sale price without VAT – CMV – IIBB – Collection – Commissions = Marginal contribution
The variable costs that we identify in an online store are:
- Cost of goods sold (CMV): is what it costs to produce or buy the good. If produced, labor and materials will be considered.
- Gross Income (IIBB): about 3% of the price without VAT, in most cases.
- Collection: varies depending on the payment gateway, but it is usually 5% of the sale price.
- commissions: either for the platform or for the sellers, a 3% commission can be estimated.
If this account is made with a single product, it is called Unit Marginal Contribution.
Expense table
The cost table is the sum of:
- Marketing expenses;
- administration expenses;
- logistics expenses.
The way to detail this table will depend on what you want to measure and control.
For example, within marketing expenses you can include and because it helps you to measure the incidence of a change in the total result.
In the administration expenses you have to take into account the time you dedicated to the tasks, beyond the fact that a salary is not paid.
It is convenient that the logistics expenses are in the expenses table because, if you consider them variables, it could make it difficult to calculate the marginal contribution.
With this information you are ready to calculate the point of balancewhich shows the sales needed to neither win nor lose.
This is how it is calculated:
Breakeven = Total expenses table / Marginal contribution in %
If you want to calculate it in units, you have to do the following:
Breakeven = Break-even point in pesos / Average price of products
Continue with financial analysis
In order to understand if a business is giving good results, it is necessary to make a detailed monitoring of the budget invested in each stage.
There are no secret formulas for your success, but it’s about testing and measuring results, analyzing what works and what doesn’t to see where you need to make adjustments and achieve an increasingly healthy business.
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