How does a business know when it's time to grow?
In general, businesses should make a move only when there are growth opportunities that can benefit your business and give you an immediate (typically, less than six months) return on investment. Think of it as planting a tree that already bears low-hanging fruit. There may be an untapped market niche you want to capitalize on; or, perhaps, a new location that will deliver significantly greater traffic at your grand opening. Whatever change you initiate, have a well-developed plan with plenty of contingencies should events not pan out as expected.
And, certainly, understand that expanding operations does not always guarantee success. You may be doing more volume by moving to a larger or second location, and working harder. But, with the additional overhead, you may not make any more money.
You may be asking, “Why then should I even undertake the challenge?” The only point made here is there are no guarantees, and a lackluster result is inevitable if you don’t know how much more you will need to sell to cover your investment.
Accordingly, allow me to introduce the break-even formula:
Fixed expenses (overhead)
Break-even volume = _______________________________________________
Gross-margin percentage – Variable-expense percentage