What’s Your Break-Even Point?
Regardless of how much revenue your business brings in, it matters little if you aren’t turning a profit, as most businesses can’t operate at a loss for very long and remain open. It’s impossible to know whether or not you are making a profit, or even to begin to make plans on how you will cover your costs and begin to turn a profit, without first determining your break-even point.
While determining your break-even point is an important essential task in strategic business planning, it’s really not as difficult a calculation as you might fear. Your break-even point is simply the amount of products or services that you must sell over a given period of time to cover all of your costs of doing business. Any amount that you sell over your break-even point is profit.
Calculating Your Break-Even Point
When calculating your break-even point, care must be taken to not leave out any of your costs. There are several types of costs that you will want to include in your calculations.
Start-up costs are costs related to the initial creation of your business. They can include:
- Legal fees for drawing up contracts related to the startup of your business.
- Investigation and research fees related to the start of your business, such as scouting for locations.
- Fees to pay for incorporation or licensure to open the business.
Unlike variable or start-up costs, fixed costs remain the same, regardless of the amount of production or point in time of your business. Examples of fixed costs include:
- Insurance payments
- Loan payments
- Other costs related to overhead. These costs continue whether or not your business produces or sells anything.
A variable cost frequently changes in harmony with production. In general, as production increases so do variable costs. Examples of variable costs include:
- The cost of raw materials.
- The cost and amount of packaging or shipping your product.
- Paid or hourly wages paid that are tied to production.
- Merchant fees for credit card transactions.
- Advertising costs
Once you’ve determined your total costs for a period of time, say one month, you will have some idea as to how much revenue your business will need to bring in to cover these costs. You can then easily project your break- even point out over longer periods of time, such as one or more years.
Now That You Know Your Magic Number – What is it Good For?
Of course, most of us don’t go into business with just the intent of covering our costs. Most of us prefer to be rewarded for our hard work and efforts with a reasonable amount of profit that will enable us to live comfortably as well as to fund the fulfillment of some of our dreams. Once you know your break-even point, you can begin to make plans on how to achieve a healthy margin of profit that will help you to build a strong, sustainable company.
Knowing your break-even point also gives you the power to try out numerous strategies that may help you to increase your profit margin over time. For example, once you know your break-even point, you have a better idea on whether or not it is worthwhile to put specific products or services on sale or even if it will make sense to add to and expand your product lines. You might also become aware of areas where you can make changes that will cut some of your costs.
If all of this talk about break-even points and profit margins is a bit overwhelming, or just seems too tedious and you would really prefer to focus on other aspects of your business, such as serving the needs of your customer, we’re here to help! Why not contact us for a consultation today and let us take care of these details for you so that you can get back to what you love best – running your business!