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As we learned in our recurring revenue calculation, one of the important numbers to know is how much money you make per month or per week!
But what if you wanted to know how many months or weeks it would take until you made that amount of money? Or what about looking at the opposite side of this equation — how long it will take to lose that income?
In this article, we will look at some other ways to calculate your constant monthly income (CMI) and variable monthly income (VMI) from your business. We will also find out how to determine your break-even period with no income!
This information can help you evaluate whether your current business model has an adequate cash cushion, as well as give you insights into how profitable your business is already. It can also be used for setting financial goals such as reaching profitability, achieving steady growth, or determining when to launch new products or services.
Disclaimer: The content in this article should not be construed as financial advice, nor does it represent the opinion of FastWebDomains. These calculations are purely mathematical exercises designed to provide more insight into the performance of your business. Therefore, these results may differ greatly depending on the specifics of your own business and its market conditions.
We recommend doing your research before investing in any domain name or website hosting package. A good source of all things web related is the Internet itself! You can start by reading our articles or checking out some of our links.
Even though you do not have direct expenses for each product, you can still calculate how much it cost to make a given item. These are referred to as variable costs.
Variable costs include things like shipping, marketing materials, website hosting, etc. That way, you can subtract these from your revenue to determine what exactly is left over.
By doing this, you will be able to identify whether or not the remaining money is enough to cover all of the costs for the products that bear his/her name. This gives you an idea of whether it is necessary to continue producing them or if they are no longer profitable.
You can also use this information to brainstorm new ways to produce and sell other similar items. For example, instead of creating your own line of skincare products, why not start out by making some simple beauty supplies such as makeup brushes? Then, once you see that the market is there, you could move onto more complex skin care products.
In the previous section, we calculated our variable cost per hour as the price of producing one show times the number of hours for that show. We also determined our total revenue to be the average of the six episodes we produced.
Now it’s time to calculate our fixed costs. A fixed cost is an expense that does not change much depending on how many copies of a product or service you have. Some examples of these are office supplies like paper and pens, smartphone apps, and running a studio space.
We will add these up here because they all apply to Netflix!
Our monthly overhead comes out to about $20,000. This includes utilities (electricity, water, internet), legal fees, general business expenses (phone bills, postage), and miscellaneous expenditures (cable TV services, coffee). All of these costs remain relatively constant no matter what.
Variable costs, however, can go down if we reduce the amount of production we do. For example, if we decide to stop filming new shows and focus only on re-airing old ones, our budget would drop due to lower salaries and equipment rentals.
Fixed costs, on the other hand, stay the same unless we close the doors completely. These include things like our office space, legal documents, and technology used to produce content.
In our last lesson, we calculated how much you need to make per month to be able to cover your monthly expenses with just that income. Now it’s time to do the opposite! What is the lowest amount of revenue you can spend before you start breaking even?
The term for this is your “break-even point,” or BEP. The average entrepreneur needs to know their BEP so they can better understand whether or not their business will survive depending on what kind of sales they get each week.
If your main source of income is very strong, then you might be able to keep spending more money because those sales are high. If your only source of income comes from less frequent purchases, though, you should look into lowering your costs as much as possible!
You could try free trial services or discount sites to see if those work any better than offering your own product full price. You could also consider outsourcing certain tasks like marketing, designing, etc. to save money in running your business.
In the previous section, we discussed how to calculate your average transaction size. This is very important as it determines how much money you need in order to reach your recurring revenue goal. If your average transaction size is $100, then you will need to make at least $1,000 per month in gross revenues to earn your desired level of income.
By having more transactions each month, you will be able to meet your monthly earnings target easier!
Another way to look at this is that if you made only $500 per month, you would have to spend an extra $2,000 per year to achieve your yearly income goals. The better your average transaction size, the shorter it takes to hit your yearly income goal!
Now that we have determined how many transactions you need to achieve your recurring revenue goal, let’s determine what kind of businesses require this number of transactions to stay successful.
In the previous section, we learned how to calculate the average number of transactions per day to determine how much revenue you need to make in a given period to break even, or make a profit. But now it is time to take it one step further and assess whether or not you will achieve that goal!
Most online businesses break down their monthly income into a series of discrete payments called “revenue days”. A revenue day can be defined as any payment month where you earn enough money to cover your business costs, including rent or house fees, utilities, website hosting, marketing expenses and more.
A common way to define this cutoff is to make sure that you have spent less than what you earned during the last consecutive months. For example, if you did not spend more than $5,000 per month on your business then you would get a revenue day every month until you reached that total.
However, this could also mean that you might not ever reach profitability because you could only afford to run your business for so long before shutting it down due to lack of funds. Therefore, it is important to know how many revenue days you will get in a specific length of time so that you do not overspend and risk closing down your business.
A key part of determining if you have enough revenue to stay in business is calculating your target profitability. This is typically done by taking your monthly revenues and dividing it by the amount of time it takes to run out of money.
Your target profit should be able to give you an idea of how much income you’ll make per month, as well as whether or not you’re being over-budgeted for at this current stage.
For example, let's say your company has a one year contract that costs $10,000 a month. You would want to know whether or not you are spending more than necessary now so that you can keep funding the business until you reach self-sustainability. Or perhaps you could find another client and reduce the cost of the contract?
There are many ways to calculate target profits, but our best advice is to simply add up all of your recurring expenses (rent, utilities, etc.) and divide them by the number of months left before they run out.
The second part of this equation is how long you expect to keep paying for the product or service you’re investing in. This is referred to as the duration of the engagement.
Most entrepreneurs underestimate the importance of this number. How much money you invest in your business depends heavily upon how likely you are to keep spending money, and how much money you need to be successful.
If you have a low investment budget, then you should consider producing lower-quality products or services that cost less to make. You may also choose not to market as hard because it costs no more than putting up a banner ad on Facebook!
On the other hand, if you have a high investment budget, then you can afford to spend more on marketing, better quality materials, etc.
Key customers are people who spend the most money with you, or motivate other people to start spending more with you. They are also referred to as high value buyers or influencers.
By understanding who your key customers are, it is easy to understand how important they are to your business. You can use this information to focus your efforts on increasing their purchase amounts or influence over others.
It is common to think that all of your current customers are essential to your business’s success. However, by identifying which ones are able to easily be persuaded to buy from you, you may be missing out on crucial opportunities to increase revenue.
Some of your current customers may not need or want what your business has to offer. By investing in relationships with these individuals, you could see decreases in sales due to customer dissatisfaction.
Instead of wasting time trying to get those less likely to do business with you to change their behavior, find ways to encourage them to go digital.
