Do You Know Your Break-Even Point
How To Calculate Your Break-Even Point
Break even analysis (BEA) is used to determine when your business will be able to cover all its expenses and begin to make a profit. It is important to identify your start up costs, which will help you determine the sales revenue needed to pay ongoing business expenses and fund the working capital requirements of the firm in the longer run. A break even analysis is a key part of any good business plan; it can also be helpful even before you decide to write a business plan and figure out if a particular business opportunity is worth pursuing. Long after your company is up and running, it can remain helpful as a way to figure out the best pricing structure for your products. BEA, is a supply side analysis, which means it only analyzes the costs of sales, it does not analyze how demand may be affected at different price levels.
Break-even point (BEP) is the point at which revenues equal expenses. Calculating the break-even point of a company is proved to be a simple and quantitative tool for the business owner as BEP is extremely useful when making important decisions in your business. For example preparing competitive bids, setting prices and applying for loans. You can also use BEP to make various decisions, such as: to discontinue the product, improve marketing strategies or even re-price the product to stimulate demand.
How does it work?
In order to calculate your break even point (the point where your sales cover all of your expenses), you will need to know three key numbers. This is how much money you receive, on average, for every product or service that you sell. Be sure to count any discounts or special offers that you may give to your customers.
The three numbers you will need to know are, (1) Average Per-Unit Revenue, (2) Average Per-Unit Cost and (3) Estimated Monthly Fixed Cost. You will also need to calculate your Gross Profit Margin.
Using the example in the video those numbers are as follows: (In this example, the GPM is 60%)
1. Average Per-Unit Revenue - $10.00
2. Average Per-Unit Cost - $4.00
3. Estimated Monthly Fixed Cost - $2000.00
$2000.00/60% = $3,333.33
Monthly Units Sold Needed Break Even = $333.33
Monthly Revenue Needed to Break Even - $3,333.33 (Estimated Monthly Fixed Expenses/GPM)
Based on this model, you would have to sell 333 units in a given month in order to break even.
You would have to have sales of at least $3,333.33 in order to cover all of your monthly costs.
In order to make a profit, you would have to sell more than 333 units, or have sales of more than $3,333 each month.
The break even analysis will help an entrepreneur to determine the sales quantity or number of products that need to be sold in order for the business to generate substantial revenues to cover its expenses. It allows an entrepreneur to know how much profit he can earn at different sales volumes, BEA allows the entrepreneur to set an optimum price for the product, by setting different price levels and evaluating the break even analysis at each level will help an entrepreneur to study the effect of each price level, in relation to other major factors such as consumer affordability, inventory management and price competitiveness.