Do You Know the Break-Even Point for Your Business?
The break-even point is probably the most important measure for a new business owner to understand and utilize in decision making. It is the point at which total revenues equal total expenses (fixed and variable), and profit is zero. Any revenue earned beyond the break-even point is pure profit. The break-even point can be displayed in either number of units or amount of sales, and is calculated with one of the following equations:
Why is it so important to know the break-even point?
In order for a business to be successful, it is vital that management know what the costs of the business are to determine the amount of revenue it needs to generate to cover those costs. Otherwise, the business is just operating at a loss. As I stated in a previous blog post, the golden rule of business is to maximize profits. This is a hard rule to follow if your business is not making a profit and management doesn’t have any idea when it will.
Knowing the break-even point will not magically make your business profitable but it is the first step. What it will do is enable you to determine appropriate prices for business services and products, and establish sales goals for specified periods. It will also help you estimate when the business will break-even and plan for the amount of capital and/or financing you will need to start the new business and operate it until it does become profitable. Furthermore, an established business can use break-even points to plan for, price and evaluate the success of new product and service offerings.
Need help in determining the break-even point for your business and/or leveraging its financial information to maximize profits? Contact us today!