Break Even Analysis: What Is It and How To Calculate It
Small business owners and future entrepreneurs everywhere are basing their success on this one simple math calculation: the break even analysis.
But what is the break even analysis? How do you determine your figures? And what is it about this math problem that makes or breaks your success?
Take a look at this smart program and how it has influenced business owners in all specialties and levels. It’s a great way to mark growing success in your field and beyond. Take a look at what the break even analysis means and how you can incorporate it in your own venture in the future.
What Is the Break Even Analysis?
The break even analysis is, just as it sounds, the point at which your business will break even with total revenue. It’s a way to calculate your initial investment and learn when you will become profitable despite total variable costs.
Creating this figure early on in your business—or before you even start—allows you to understand how much is going out vs. how much needs to come in in sales revenue or net profit. It’s a great way to get your feet wet as an entrepreneur and understand the value of your product or service.
Creating your customized version of the break even analysis formula allows you to know what you’re getting into early on and what the variable costs of production will likely be. For instance, if your dream is to create a business that is expensive to run, you’ll know you have to be in business for X months or book Y requests before you can turn a profit.
In other words, it gives you an idea of how long you’ll have to float before you can start to see new funds rolling back in and lower variable costs. The break even analysis can give you a realistic look at what you’re dealing with, as well as learn how realistic it is to go for your dreams.
Why the Break Even Analysis Matters
You can’t earn money without first spending money. Every aspiring business owner knows this. But it’s actually far more important to keep track of said money along the way rather than making educated guesses. You have to know what your business will cost and how much it costs you to live. Know exactly what you are getting yourself into before you dive in too deep.
Besides, it’s just smart business practice to know where your accounts are sitting. Why wouldn’t you want to know how far you are from turning a profit? By creating a smart figure, you can do just that. Then mark off each sale in a spreadsheet and know where you’re at in order to grow and goal seek.
Whether you choose to offer pre-orders for a number of units or would rather jump right in, creating a break even analysis that’s designed around your business will show you right where you need to be. It gives you a goal, and more importantly, it provides you with peace of mind. Sell toward growth.
How To Create Your Own Break Even Analysis
To create your own break even analysis, you need to have your business plan in place. You need a clear view of what you’ll be offering, who your market is, and more. Once you have this at the ready, you can start moving on to figures and determining how much to charge each customer.
List All the Things You Need
Next, list what you’ll need to make your service or product take place. What supplies do you need? Write down everything, even small items you may already have on hand. This includes your vehicle, monthly operating costs, Microsoft Excel access, a retail store, labor, or anything else you may need in order to make your brand run smoothly.
There should be a list of fixed costs that won’t change each month—for instance, rent or mortgage, insurance premiums, internet access, wages or fees to workers, and products that will remain the same price over time.
Next, consider prices that will fluctuate, like utilities.
Compile Your Numbers
Now, start compiling those numbers. When making a product or providing a service, you should do a price breakdown per customer. If you need a bottle of glue that costs $8, but that glue will last for 20 uses, divide the cost by each use. That’s how much product fee in glue you’ll use for each round.
Do this for each of your supplies. Then, add in operating costs and see how much you need to make in projected sales in order to pay the bills and make ends meet.
The total fee of your expenses is an important number. Write it down and keep track of it as you go. Next, you’ll set a price for each product or service. This should take into account the value of each item you’ll use.
Divide your total expense fee by product fees and see what you come up with. For instance, if you put $5,000 into the business and you’re selling keychains for $5 each, you’ll have to sell 1,000 keychains before you break even. And so on.
This is purely an example, of course. Your funds put in, your price point—everything will be different. That’s also why it’s important to know where your break even point is. How much do you need to make in sales dollars before your business becomes profitable?
Ask yourself this before you get started. It’s a quick way to know when you’re bringing in money vs. paying off what you’ve already spent. And it can give you peace of mind in understanding when your business has become a success.
How To Use the Break Even Analysis in the Future
If you adjust a selling price, add a new product or service, or switch retailers or suppliers, the break even analysis can continue to benefit you.
You can also do it to track your success going forward in a variety of different scenarios. As you continue to do business, simply adjust the analysis to track how you’re profiting along the way.
You’ll learn methods as you go, of course. This is simply one of the most basic ways to track your progress and unit sales as an entrepreneur.
What Are the Perks of Using the Break Even Analysis?
Remember, your break-even volume isn’t set in stone— you can adjust it as you go. This is important for when you come across a hidden expense, new average variable cost, or have to add a new ingredient that you hadn’t initially planned for. Don’t fret when this happens; just adjust your fees. This is easiest when done during the planning stages, and it can help set you up for success going forward.
Doing so can give you the most accurate look at what you are actually spending with your new business. Don’t overlook just how important this step can become.
Creating your break even analysis is also an important step to ensure that you know what level your income is at and whether or not you are overspending. So many business owners don’t have a good grasp on their finances in early stages. Creating this model will help eliminate the stress and doubt of simply not knowing, and instead, allow you to pinpoint the status of your funds and units of sales.
Give yourself peace of mind and put a clear point on where your finances will land with the upcoming launch of your business.
There are many ways you can plan for success and track your company’s growth as a new or upcoming business owner. Don’t discount just how much these methods can help add organization, a margin of safety for peace of mind, and better financial tracking in general. With the break even analysis template, you can monitor your level of production, sales volume, and unit sale price to determine when your total profits will be more than your total cost.
Better still is that the problem can be adjusted as your prices or product needs change over time. Never wonder where or at what point your new business will become profitable. Instead, keep track and remain sure with the break even analysis.