Learn how to calculate your way to success.
A break-even point is a point in a business when the cost of running the operation equals its revenue. While it is expected that any new company will take time to reach profitability, finding your break-even point as early as possible is crucial to the business' long-term prospects. After all, any new business owner wants to avoid going further into debt as the company gets up and running. A break-even point is a good starting place, but you’ll need to conduct a cost analysis to find that point.
Analyze your fixed costs
To make sure your break-even analysis is correct, you’ll want to first look at your fixed expenses. Fixed costs include everything from the rent you pay, to the software you have leased or purchased. Your fixed costs will also include any money you pay for advertising and other start-up costs associated with bringing the business up to speed.
Salaries, rent, electricity, and equipment all need to be factored into your fixed-costs analysis. These numbers should stay the same month-over-month regardless of your production. It is a good starting point to see where your business is, and if there is any fat that can be cut.
Don’t forget your variable costs
Variable costs are any expenditures that vary based on your production output. In short, variable costs change based on how much you are putting out. Variable expenses are likely to include raw materials, and the production time required to produce each product. When production increases, the variable costs increase with it.
If you own, say, a bakery, you’ll find that the variable cost of production will rise with the output. So, if it costs you $10 in raw material to make a batch of cupcakes, two batches of cupcakes will cost $20 to produce. If two batches of cupcakes cost $20, then ten batches will cost $100 and so on. The cost of direct labor will also rise with increased production.
Combining the two to find your break-even point
After you’ve looked at your variable costs and your fixed costs, you’ll need to combine the two to find a break-even point. Say your cupcakes cost $100 to produce ten batches (when you factor in ingredient and direct labor); you would think $100 is your break-even point. That is not the case, though. You also have to factor in how much you are outlaying in fixed costs.
If your fixed costs are $1,000 a month, and you sell ten batches of cupcakes for $200, you are still operating $800 in the red each month. If you, however, up production rates and/or raise the price of the cupcakes to cover your fixed costs and your variable costs, you’ll find your break-even point. So, if the fixed costs are $1,000 and the cupcakes are $10 per batch to create, but you are selling them for $20 per batch, you’d need to produce 100 batches of cupcakes to break even.
Taking the time to run a few quick calculations could save your business big down the road.
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