The most important tool to help you figure out if you can afford a new venture is the break-even analysis. The break-even analysis computes the break-even point: the volume at which all fixed expenses are covered. After that point, you will be able to make a profit.
Organizing an Event
Let's start with a simple example. You have been asked to organize a continuing education program for your local nurse practitioner (NP) group. You have no financing and are asked to try to make a profit to help fund the NP scholarship program. You need to cover all your expenses by charging fees. You will not receive any grants or outside financial support.
How much will this program cost regardless of the number of attendees who register? This amount is your fixed costs. Fixed costs will include room rent, speaker fees, any equipment rental, and cost of brochure printing and mailing. Now consider your variable costs-the costs you will incur per attendee. This will vary by the number of attendees, and will include food and handouts. For simplicity's sake, I am not listing every expense. It is critical, however, that you include all your expenses, both fixed and variable, for accuracy. For example, don't forget to include taxes and tips for food costs.
How will you pay for these expenses? You will be charging attendees a fee, which is the unit price. By determining how many attendees you will have, the expected unit of sales, you will be able to figure out how to cover your expenses.
So a break-even analysis is dependent on your understanding of:
* the fixed product cost (how much to run the program regardless of attendees)
* the variable product costs (how much it costs you per attendee)
* the product's unit price (program fee)
* the product's expected unit of sales (how many attendees will come).
Do the Math
To demonstrate, let's do the math. The Weatherhead School of Management at Case Western Reserve University's Web site also has a helpful break-even analysis tool (http://connection.cwru.edu/mbac424/breakeven/BreakEven.html).
* Fixed ExpensesHall rental (includes AV fees) $250Speaker's fee $500Total $750
* Variable ExpensesBreaks/Lunch $15Handouts $5Total $20How many attendees will sign up? What is the total room capacity for seating and food? You will need to make your best educated guess. Based on previous projects, you decide that you can attract 50 people. The room can hold 100. You determine that you will charge $45 registration fee for your program.
* Revenue$45 x 50 attendees = $2,250
* ExpensesFixed expenses $750Variable cost for 50+$1,000Total $1,750Revenue $2,250Less expenses $1,750Equals $500 Profit
By changing the amount of people attending and your fee, you can manipulate these numbers until you arrive at a formula that suits your needs. You can decide if the project is viable and what is the minimum number of people to make this program work.
If you're not sure what all your expenses might be or how to determine where all your sources of revenue may come from, consult a financial expert, such as a certified public accountant. If you need help figuring out how many people to attract to a project or how to attract them, consult a marketing expert.