Leading Entrepreneurship

In my post on target sales analysis, we discussed how to determine the appropriate level of sales to generate in order to meet your financial goals. In this post, we look at the target price-volume analysis.

In our previous example, we were looking to start a computer software store with approximately $850,000 in target sales. Of course, this number is of little use to us without some additional analysis. Let’s look at the next step:

Target Volume = Target Sales / Target Purchase Price

Let’s assume, for analysis sake, that we anticipate the average purchase in the store to be $50.

Target Volume = $850,000 / $50 = 17,000 purchases (or about 47 purchases per day)

A service firm can use the same process. Assuming we wish to make the same $80,000 and need to spend $20,000 on sales and marketing:

Target Volume = $100,000 / $100 (per hour) = 1,000 billable hours

We can always switch the target price and volume positions to create a variation on the theme:

Target Purchase Price = Target Sales / Target Volume

Using the same service example:

Target Purchase Price = $100,000 / 1,000 billable hours = $100 per hour

As a side note, I chose 1,000 billable hours very carefully, even though it is a nice, round number. At 1,000 billable hours, I still have another 1,000+ hours to handle administrative, hiring, marketing and sales tasks. Also, if I can meet my target salary in 1,000 billable hours, I have plenty of buffer for price negotiations and can earn a “reserve” that I could use to grow and cover initial payroll for my future staff.