Is this business viable?
Break-even 0Sales level 0Profit 0

Drag the white sales marker to read profit at any monthly volume. Costs here are operating costs (fixed + variable); loan interest and depreciation are added in the statements.

Contribution / unit
0
price − variable cost
Contribution ratio
0
of each shilling of sales
Break-even volume
0
units / month
Break-even sales
0
KES / month
Expected volume
0
average month, year 1
Margin of safety
0
of expected sales
Lowest balance 0Capital needed 0
Yellow cells are editable: type your own sales units or one-off receipts and payments. Months in red end with negative cash.
Interest method used by the lender

Reducing balance: each month's interest is charged only on what you still owe. Flat rate: interest is charged on the full original loan every month, so the same headline rate costs much more.

Income statement year 1

Balance sheet end of month 12

Costs, contribution and break-even

Fixed costs $F$ (rent, salaries, insurance, licences) do not change with monthly output. Variable costs $v$ per unit (ingredients, fuel, fabric, payment fees) rise with every unit sold. Each unit sold at price $p$ earns a contribution towards fixed costs:

$$\text{CM} = p - v, \qquad \text{CM ratio} = \frac{p-v}{p}$$

Total revenue is $TR = pQ$ and total cost is $TC = F + vQ$. Profit $\pi = (p-v)Q - F$ is zero at the break-even quantity:

$$Q_{BE} = \frac{F}{p - v}, \qquad \text{Break-even revenue} = \frac{F}{\text{CM ratio}}$$

The margin of safety tells you how far sales can fall before the business makes a loss: $\text{MoS} = \dfrac{Q_{\text{expected}} - Q_{BE}}{Q_{\text{expected}}}$. A high-fixed-cost business has high operating leverage: profit swings sharply when sales change.

Profit is not cash

A profitable business can still run out of money. The cash-flow forecast tracks when money actually moves:

$$\text{Closing balance}_m = \text{Opening balance}_m + \text{Receipts}_m - \text{Payments}_m, \qquad \text{Opening}_{m+1} = \text{Closing}_m$$
  • Receipts: cash sales, cash collected from last month's credit customers, the owner's capital and loan drawdowns.
  • Payments: variable and fixed costs, equipment purchases and loan instalments (interest and principal).
  • Credit sales create receivables: revenue is earned now but cash arrives later. Equipment is paid for at once but expensed slowly through depreciation. Loan principal is a cash outflow but not an expense.

The most negative closing balance is the extra capital needed to avoid an overdraft.

Loans: reducing balance versus flat rate

With reducing-balance (amortising) interest, each month's interest is charged only on the amount still owed. The equal monthly instalment for principal $P$, monthly rate $r$ (annual rate ÷ 12) and $n$ months is:

$$A = \frac{P\,r}{1-(1+r)^{-n}}$$

Each instalment splits into interest $rB_{k-1}$ and principal $A - rB_{k-1}$, so early payments are mostly interest and later ones mostly principal.

With a flat rate, interest is charged on the original principal for the whole term: total interest $= P \times i_{\text{flat}} \times n/12$ and $A_{\text{flat}} = \big(P + P i_{\text{flat}} n/12\big)/n$. Because you keep paying interest on money you have already repaid, the true cost is far higher. The effective APR is the rate $r$ that solves

$$P = A_{\text{flat}}\,\frac{1-(1+r)^{-n}}{r}, \qquad \text{APR} = 12r, \qquad \text{EAR} = (1+r)^{12} - 1$$

which is found numerically. For typical terms (6–60 months) and rates, the true APR is roughly 1.5 to 1.9 times the quoted flat rate: the ratio is highest for short-to-medium terms at low rates and falls for long terms at high rates (it is 1.75 in Example 3).

Investment appraisal

Money now is worth more than money later, so future cash flows $CF_t$ are discounted at the cost of capital $k$:

$$NPV = \sum_{t=0}^{T} \frac{CF_t}{(1+k)^t}$$
  • NPV > 0: the project earns more than the cost of capital and adds value.
  • IRR is the discount rate at which $NPV = 0$. It has no closed form, so the lab finds it by bisection. Accept if IRR > $k$ (for conventional cash flows: one outflow followed by inflows).
  • Payback period: time until cumulative cash flow turns positive (interpolated within the year). Discounted payback uses discounted cash flows, so for any positive discount rate it is longer (and a project can pay back in cash yet never in present-value terms).
  • Profitability index $= PV(\text{inflows}) / |CF_0|$.

The NPV profile plots NPV against $k$. It crosses zero at the IRR; the steeper it is, the more sensitive the decision is to the discount rate.

Financial statements and ratios

The income statement runs: revenue − cost of sales = gross profit; − operating expenses − depreciation = operating profit (EBIT); − interest = profit before tax; − tax = net profit. The balance sheet must balance: assets = liabilities + equity, where equity is owner's capital plus retained profit.

$$\text{Gross margin} = \frac{\text{Gross profit}}{\text{Revenue}}, \quad \text{Net margin} = \frac{\text{Net profit}}{\text{Revenue}}, \quad \text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$
This is a simplified educational model: tax is a flat rate on positive annual profit with no loss relief or VAT, overdraft interest is ignored, flat-rate interest is spread evenly over the term, and all figures are planning estimates in KES. It is not financial, tax or investment advice; consult a qualified professional before committing money.

Example 1: Café break-even (default café)

Price KES 350 per cup or meal, variable cost KES 140, fixed costs KES 205,000 per month.

  1. Contribution margin $= 350 - 140 = 210$; CM ratio $= 210/350 = 60\%$.
  2. $Q_{BE} = 205{,}000 / 210 = 976.2$, so the café must sell 977 units a month (about 38 a day over 26 trading days).
  3. Break-even revenue $= 205{,}000/0.60 = $ KES 341,667 per month.
  4. The default forecast averages 1,076.5 units a month over the year, so MoS $= (1076.5 - 976.2)/1076.5 = 9.3\%$: sales only need to slip by a tenth for the café to make an operating loss.

Example 2: Reducing-balance loan

KES 600,000 at 16 % a year over 24 months.

  1. $r = 0.16/12 = 0.013333$.
  2. $A = \dfrac{600{,}000 \times 0.013333}{1 - 1.013333^{-24}} = \dfrac{8{,}000}{0.27231} = $ KES 29,377.87.
  3. Month 1 interest $= 600{,}000 \times 0.013333 = 8{,}000$; principal $= 21{,}377.87$; balance $578{,}622.13$.
  4. Total repaid $= 24 \times 29{,}377.87 = 705{,}068.79$, so total interest is KES 105,068.79. Each month the balance is lower, so less of the fixed instalment is interest and more repays principal.

Example 3: The flat-rate trap

A boda-boda dealer offers KES 600,000 at "18 % flat" over 24 months.

  1. Interest $= 600{,}000 \times 0.18 \times 2 = 216{,}000$; instalment $= 816{,}000/24 = $ KES 34,000.
  2. Solve $600{,}000 = 34{,}000 \times \frac{1-(1+r)^{-24}}{r}$ numerically: $r = 2.622\%$ per month.
  3. APR $= 12r = $ 31.5 % (1.75 times the headline); effective annual rate $= 1.02622^{12} - 1 = 36.4\%$, about twice the headline. The "18 %" loan is far dearer than it sounds.

Example 4: Solar fruit dryer NPV and IRR

Cost KES 500,000; net cash inflows 120,000, 150,000, 170,000, 170,000 and 200,000 (year 5 includes 40,000 resale value). Cost of capital 12 %.

  1. Discount factors $1/1.12^t$: 0.8929, 0.7972, 0.7118, 0.6355, 0.5674.
  2. PVs: 107,143 + 119,579 + 121,003 + 108,038 + 113,485 = 569,248.
  3. $NPV = 569{,}248 - 500{,}000 = $ KES 69,248 > 0: accept.
  4. IRR by bisection: NPV is zero at 17.0 % > 12 %.
  5. Payback: cumulative −380k, −230k, −60k, then +110k in year 4, so $3 + 60/170 = 3.35$ years. A positive NPV and an IRR above the 12 % cost of capital both say the dryer earns more than the money costs.

Click "Solar fruit dryer" in the Investment tab to see these figures in the lab.

Example 5: Credit sales and cash

A tailor sells KES 150,000 of school uniforms in January, 30 % on credit to a school that pays in February.

  1. January cash receipts from sales $= 0.7 \times 150{,}000 = 105{,}000$; the other 45,000 is a receivable.
  2. January revenue in the income statement is still the full 150,000: profit is recognised when earned, cash when received. So the January cash plan must cover the month's costs from KES 105,000, not 150,000.

Guided scenarios

Each scenario loads a business in trouble and sets goals. The goals are tracked live above the charts; the scenario ticks off when every goal is met.

Challenges

Challenges tick themselves off as soon as your business meets the target.

    Guided experiments

    1. Price versus volume. In the café, raise the price by KES 50. How much does break-even volume fall? Would you lose more than that many customers? Expect: the contribution rises from 210 to 260, so break-even falls from 977 to 789 units a month, about 19 % fewer sales needed.
    2. Operating leverage. Compare the mobile app (high fixed, low variable cost) with the tailoring shop (lower fixed, high variable cost). Which one's profit is more sensitive to a 10 % fall in sales? Change only the sales volume and record profit before and after. Expect: the app, because each shilling of lost sales costs it about 85 cents of profit (CM ratio 0.85) against about 54 cents for the tailor.
    3. The credit squeeze. In the tailoring shop raise credit sales from 30 % to 70 %. Profit hardly changes. What happens to the lowest cash balance and the current ratio? Expect: lowest cash falls from about −46,000 to about −122,000 and the current ratio from about 2.7 to about 1.6: the same profit, but much more of it is still owed by customers.
    4. Flat versus reducing. Switch the boda-boda loan between flat and reducing balance at the same headline rate. Record the instalment and total interest. Then find the flat rate that costs the same as 18 % reducing. Expect: on KES 600,000 over 24 months, 18 % flat costs KES 34,000 a month and 216,000 interest, against 29,954 and 118,907 reducing; a flat rate of about 9.9 % matches 18 % reducing.
    5. Discount rate sensitivity. For the solar dryer, slide the discount rate from 5 % to 25 % and note where the decision flips. Read the IRR off the NPV profile. Expect: NPV falls from about +194,000 at 5 % to about −86,000 at 25 %, crossing zero at the 17.0 % IRR.
    6. Seasonality. Turn seasonality up to 150 % in the salon. Which months need cash from earlier months, and how much extra capital is needed? Expect: the quiet first half of the year drains cash; the lowest point moves from March to June and the extra capital needed rises from about KES 84,000 to about KES 123,000.

    Finance in practice

    Comparing loan offers. Banks, SACCOs, microfinance institutions, asset-finance dealers and mobile lending apps quote rates in different ways: per month, per year, flat or reducing, with or without fees. Convert every offer to an effective annual rate before comparing.
    Mobile money. Paybill and till fees are a variable cost per transaction. Settlement is fast, which improves cash flow compared with selling on credit.
    Boda-boda asset finance. Motorcycles are often bought on hire purchase with weekly or daily repayments and flat-rate interest. Daily cash collection from riders matches the repayment rhythm.
    Seasonal cash. January school fees reduce household spending in many businesses, while December festivities raise it. Seasonal businesses must save in good months to pay rent and salaries in slow ones.
    Tax. Kenyan resident companies pay corporate income tax of 30 % on taxable profit, the lab's default. The Finance Act 2025 added a reduced rate for start-ups certified by the Nairobi International Financial Centre (15 % for three years, then 20 % for four). Small resident businesses with gross turnover above KES 1 million and up to KES 25 million a year may instead pay turnover tax of 1.5 % of gross sales, which that Act did not change. Rules and rates change every budget, so check the current position with the Kenya Revenue Authority or a tax adviser.
    Chamas and SACCOs. Group savings and member-owned cooperatives are important sources of start-up capital and lower-cost loans for small enterprises.

    The templates use illustrative round numbers for teaching. They are not market data, quotes or recommendations, and nothing on this page is financial or investment advice.