Break-even AnalysisDecember 1, 2015 8:56 am
Launching a small business is a bit like an acrobat walking across a tightrope at the center ring of the circus. The acrobat must shift and balance their weight to safety make it across the narrow wire, much like an owner of a small business must balance costs vs profits to figure out if a break-even point will be reached each month. Just as the acrobat has a daunting task of balancing their weight, so too does the owner of small business when accurately assessing costs against sales. Let’s examine some top tips from the professionals at Small Business Association and Forcaster regarding Break-even Analysis.
What is a Break-even Analysis? If you are considering jumping into the “circus ring” and starting your own business, one of the most important business planning tools is a Break-even Analysis that can help you determine how soon your business will be profitable and be able to cover all expenses. The Break-even Analysis lets owners determine what amount of product or service is needed to sell, monthly or annually, to cover the costs of doing business–the “break-even point.” The U.S. Small Business Association states that the formula for reaching that critical threshold is: “Breakeven point = fixed costs/ (unit selling price – variable costs).”
Break-even Points to Consider-
- Start-Up Costs – It is important to identify your startup costs, which will help you determine your sales revenue needed to pay ongoing business expenses.
- Identify Fixed and Variable Costs – To calculate your break-even point, you will need to identify your fixed and variable costs. Fixed costs are expenses that do not vary with sales volume, such as rent and administrative salaries. These expenses must be paid regardless of sales, and are often referred to as overhead costs. Variable costs fluctuate directly with sales volume, such as purchasing inventory, shipping, and manufacturing a product. (Source: SBA)
- Get Contracts in Writing – If you are relying on sales and contracts long range be sure to get those in writing since it will be easier to collect (even legally) when it comes time. Even if not legally required, it’s wise to put almost everything in writing, because oral agreements can be difficult or impossible to prove. This includes leases or rental agreements, storage agreements, contracts for services (such as consulting or electrical work), purchase orders or contracts for goods worth more than a couple hundred dollars, offer letters of employment, and employment policies. Get in the habit of getting and giving receipts for all goods, services, and deposits, regardless of how much.(Source: NOLO- Law for All)
- Change Strategies of Break-even point is too high – If your break-even point is higher than you expected, don’t panic. There are some ways to balance the numbers such as: shopping around for less expensive supplies, reducing the number of, or eliminating employees altogether, working from home, and
raising your sales prices. (Source: Find Law)