A break-even analysis gives you a critical framework from which to make business decisions. It allows you to see how many products you need to sell to fund all fixed costs.
Start by creating a list of all of your fixed expenses like rent, and equipment. Then add variable costs based on unit sales.
Costs
Breakeven analysis gives you a valuable view into how much it’s going to cost to run your business, as well as when it will be profiting at the end of the year. It also lets you set your own price for products or services — a nice addition when launching new markets or products.
Breakeven analysis can help you set sales targets and budget for costs. It also allows you to see which costs remain constant and which can be minimised or completely eliminated. Obviously break-even analysis cannot predict demand and can’t reflect fluctuation of variable costs.
It’s also important to calculate a break-even analysis, how long you will take to break even, and if there are any opportunities that outweigh the risks before making a big financial move – such as raising prices or scale up. Moreover, an analysis like this can attract investment because it informs investors that your business has a long-term strategy.
Revenue
Break-even analysis can be a real value addition when you’re developing your business strategy or testing new products. By determining the point at which income is enough to support expenses, break-even analysis is also useful for discovering startup costs as well as how your business is performing in the long run.
There are several primary numbers that break even analysis involves. The contribution margin (the selling price divided by variable costs) is one of them which indicates how many units have to be sold to cover fixed expenses and recover a profit (higher contribution margins lower break-even points).
Break-even analysis will help you spot the expenses which destroy profitability such as depreciation, compliance fees, long-term agreements. These costs need to be reduced and they must be understood so that you can become more profitable – and tools like ChartExpo will give you the ability to see the data right now so you can make the best decisions that save your business from making bad choices, and stay profitable.
Profit Margin
Break-even analysis gives you a measure of the amount of sales needed to pay for set expenses and it is a critical piece of advice to help you decide what products or services you want to sell and how many you need to sell to make money. Unfortunately, though, it has a few caveats: it assumes that selling prices are fixed in response to competition or changes in demand; it doesn’t consider some costs, both fixed and variable, and therefore the calculation is more difficult.
Break-even analysis enables organizations to recognize, and aim at, future profitability; if identified, above this point production will turn profit; below this point it will go under. Break-even analyses help organizations learn how they can make money as they set up targets for growth and stay ahead of costs to ensure they do not lose money.
Risk
Break-even analysis is a wonderful tool for analyzing business costs and making better decisions, but it is only so useful: it does not predict demand or how many people would enjoy your product or service, and even it might not be correct if the data sources are incorrect.
If you are thinking of scaling or adding products to your company, make sure you do a break-even analysis first. This will allow you to know how many sales need to occur before it becomes profitable and what prices your new products will sell for.
This drawback is that break-even analysis presumes a fixed price for sales throughout the years (which could fluctuate due to the market, competition or changing customer demands). The result is that your breakeven could move and you would have to sell more product to make it profitable.
