Business jargon regularly talks about many types of Targets in Business. Target markets, target customers, sales targets – targets everywhere but who knows how to hit the bulls-eye?
Sales Targets are fundamental business metrics. How many units are required to be sold to make a profit or to breakeven? Simple enough for a small retailer. But don’t be surprised how often business owners when quizzed don’t know how to calculate breakeven or sales targets!
A mate of mine has a shop selling home-made gelato. Last year he phoned after the fact to inform me he purchased a flash pink mobile gelato cart to add to the business repertoire.
I said mate – do you think that’s a good idea – can you tell if the cart will make the business money?
He said – “Well Rod that is why I’m calling you ”.. ..He continued – “when I run it for the day I make money but when my mate works it we lose money – I’m not sure what is going on” he lamented.
How many ice-creams does the cart need to sell – to achieve breakeven. Have you set a daily sales target? I enquired. Remember we did this for the shop!
“Why do I need to a sales target for the cart ….. Selling ice-cream isn’t that technical” he hollered.
Ok here is the nuts and bolts mate – let me step you through it.
What are your total expenses for the day – the cart and ancillary expenses $100. Mates salary $100
At what price do you sell the ice-creams $3.00. How much does it cost to sell one ice-cream $0.60
Ok $3.00 – 0.60 = $2.40 this is your Gross profit per sale
$2.40 is 80% of the sale ($3.00) GP/ Sale = GP%
Ok, total daily Expense. Cart $100 + mates wage $100 = $200.00 total expenses
Now here is the simple formula. Breakeven = Expenses/ GP%
Therefore B/E = 200/ 80% = $250.00 ( this is the B/E sales target to cover expenses)
Mate I said – does the cart business sell $250 of ice-cream daily when your mate operates the cart.
Did you know $250.00(Breakeven)/ $3.00 (sale) = 84 ice-creams per day.
84 ice-creams 7 hour a day = 12 sales per hour or 1 ice-cream must be sold every 5 minutes.
I said – this is your target – tell your mate he must sell 1 ice-cream every 5 minute.
But wait a minute – do you realise if you only sell 1 ice-cream every 5 minutes you will go broke.
This sales target is your breakeven target- business makes no profit at this target.
Tell mate he must sell more – I ventured with a smirk.
“Why didn’t you tell me this- about sales targets before I purchased the cart”…. my mate Bellowed!
Hey you don’t need to start a business to work out you will go broke – Breakeven calculation can be worked out before you startup!