Profitability calculator

Other ways to calculate profitability

Months to profitability

Months = ln(break-even sales ÷ sales today) ÷ ln(1 + monthly growth), where break-even sales = fixed costs ÷ (1 − product cost − shipping and fees − marketing)

When you only need the profit month, not the cash path. Round up: 10.5 means month 11. It's the same month the calculator shows, because profit only depends on sales.

Simple runway

Runway in months = cash ÷ monthly burn, where monthly burn = fixed costs − sales × (1 − product cost − shipping and fees − marketing)

A quick check that assumes losses never shrink and stock never grows. Growth makes it too gloomy and stock makes it too hopeful, so use it only for a store that isn't growing.

Marketing from cost per new customer

Marketing share of sales = (1 − share of sales from returning customers) × cost per new customer ÷ average order value

When you budget by customer acquisition cost. Only new customers cost acquisition money, so sales from returning customers lower the share. $40 to win an $80 order with 40% of sales from returning customers is 30% of sales; type that into the Marketing box or drag the white line until it reads 30%.

Default alive or default dead

Default alive if profit reaches zero before cash falls below zero, with costs and growth as they are today

The test from Paul Graham's essay. The calculator adds the case growing stores hit: profit comes first, but stock still drains the bank, shown as "Profitable, then short of cash".

Cash conversion cycle

Cash conversion cycle = days of stock + payout days − supplier days

The days a dollar spends tied up between paying a supplier and getting paid. The working capital term above weights stock and supplier days by product cost, since stock sits on the books at cost. Work it out on its own with the cash conversion cycle calculator.

What does default alive mean for a store?

Default alive means that if nothing changes, sales grow past costs before the money runs out. Default dead means the bank empties first. The terms come from Paul Graham, and the first calculator for them was Trevor Blackwell's, built for software companies: you drag the revenue and expense lines and watch where they cross. This one works the same way, with stock added.

Software has no stock, so its cash follows its profit. A store doesn't: it pays for products weeks or months before it sells them. That's why this calculator has a third answer, profitable, then short of cash, for the store whose growth outruns the cash its profit brings in.

Why growing stores run short of cash

Each extra dollar of monthly sales needs stock on the shelf before it sells. In the example, product cost is 30% of sales, stock covers 90 days and suppliers want payment in 30, so every dollar of monthly sales ties up (0.30 × (90 − 30) + 3) ÷ 30 = $0.70.

When sales grow $5,000 in a month, $3,500 of cash goes into stock and payouts that month, on top of any loss. That's why the example's cash keeps falling for three months after it turns a profit. Fewer days of stock, longer supplier terms or faster payouts shrink that number.

How to calculate profitability: a worked example

A store has $100,000 in the bank and sells $60,000 this month, growing 5% a month. Product costs 30% of sales, shipping, packing and payment fees 15%, and marketing 30%. Fixed costs are $25,000 a month. It keeps 90 days of stock, suppliers give it 30 days to pay, and payouts land in 3 days.

• Left from each sale after costs and marketing: 1 − 0.30 − 0.15 − 0.30 = 25%. Gross margin, before marketing, is 55%.
• Break-even sales: $25,000 ÷ 0.25 = $100,000 a month. Today: $60,000 × 0.25 − $25,000 = −$10,000, so the store burns $10,000 a month.
• Months to break even: ln(100,000 ÷ 60,000) ÷ ln(1.05) = 10.5, so month 11, when sales are about $102,600 and profit about $650.
• Working capital per dollar of monthly sales: (0.30 × (90 − 30) + 3) ÷ 30 = $0.70. That's $42,000 tied up today and about $79,200 by month 13.
• Month 1: sales $63,000 and profit −$9,250. Stock and payouts take another $2,100, so cash falls $11,350 to $88,650.
• Cash keeps falling until month 13, where it bottoms out at about $16,800. From month 14, profit outruns what growth puts into stock, and cash climbs to about $508,000 by month 36.

The store turns a profit in month 11 and never runs out of cash, so it's default alive. Hold 120 days of stock instead of 90 and the same store still profits in month 11 but runs out of cash in month 14. Start with $60,000 instead of $100,000 and it runs out in month 7.

What's a good result?

The answer you want is profit before the cash low point reaches zero, with room to spare. The example's low point, about $16,800, is less than one month of fixed costs: one slow month or one large stock order would push it under. We'd want a low point of at least two or three months of fixed costs before calling a plan safe.

When the result says the store runs short, it lists what would fix it. Faster growth only helps while each sale leaves money after marketing, and it pulls cash into stock, so cutting fixed costs or days of stock is often the cheaper lever.