Time to Profit - Explained
What is the Time to Profit Formula?
Written by J. Mance Gordon
Updated at April 17th, 2024
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What is Time to Profit?
One way to compare business ideas or opportunities is through what's called time to profit. Time to profit is simply a way of estimating how long it will be from when we first start making this product (or proving a service) until we start making a profit on its sale.
To calculate Time to Profit, we need to know at what Volume of Sales will be the Break-Even point. Then we need to know, how long it will take to reach that Volume of Sales. In other words, we need to know the number of sales per period.
So the Break-Even formula would be:
Break Even = Total Cost x Sales Volume = UC + (Cost of Product x Sales Volume)
- Time until Revenue (Per established Unit of Time)
- Upfront Costs (Startup Costs to set up Business)
- Profit Margin (Gain from Sale / Cost of Product)
- Sales Volume (Total Volume of Sales)
- Sales per Period (Sales per Unit of Time)
Thus, Time to Profit formula is:
Time to Profit = (Break Even / Sales per Period) + 1
Example of Time to Profit
Jane decides to sell T-Shirts. It takes 6 months to get set up with the Equipment and Printing before she can sell any shirts. It costs $1000 to get set up. The cost of each shirt/ink/shipping, is $5. She sells shirts for $10 each.
- Time until Revenue = 6 Months
- Upfront Costs = $1000
- Profit Margin = $5
- Total Sales Volume = X
- Sales per Period = Y
Break Even = Total Cost x Sales Volume = UC + (Cost of Product x Sales Volume)
BE = $10 x X = $1000 + ($5 x X)
BE = 10X = 5X +1000
BE = 5X = 1000
BE = X = 200
So, Break Even is when Sales Volume = 200 units.
Thus, the Time to Profit =( Break Even / Sales per Period) + 1.
If you estimate sales of 20 units per period, the Time to Profit would be 10 Periods (200 units / 20 units per period) + 1 = 11 periods.
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