3 Steps to Creating a Break Even Analysis

Break even numbers can make or break a small business. On the break-even point, you’re making sales equal to your investment, so, there’s zero profits. Above the break-even point, event dollar you make is counted is profit.

Why Break-Even Analysis is Important?

lot-for-your-businessBreak-even analysis of your business is very important under certain situations.

  • When launching new products, the break-even point can help you process the new products effectively.
  • As your business expands and profits get higher. You can run a break even analysis to analyze different products and profits you’re earning through them.
  • Having your break even point sorted out is also very important when you’re going to apply for a business loan.

Creating a Break Even Point

Here are some steps you can follow to get the break even point for your business.

Determine The Variable Costs

You need to calculate the variable cost of making or purchasing the product. If the product isn’t ready yet, you can add up the costs of everything that’s used in its production. So, let’s say that after getting everything together, your product costs $10 to make.

Calculate The Fixed Costs

Fixed costs point to the minimum amount of money your business will need to operate even if you aren’t selling any products. To calculate these costs, you can determine the cost of maintaining your facility for one month. You can calculate these costs by adding up your rent, mortgage, salaries and energy costs.

So, the fixed costs represent the expenses of your business except the ones directly related to the production processes.

What’s Your Selling Price?

You also need to determine your unit selling price. This price usually varies according to your break even point. You’ll need to adjust the break even point to cover the fixed costs and other prices and make a profit on top of that.

Your break even point will keep changing according to your sales volume and other costs. You can use the mathematics of breaking even to make more business profits.

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