What You Don’t Know About Your Break-Even Point Will Kill Your Business

There used to be a really good joke about if you’re in the 25% tax bracket you work for uncle sam until at least April.  From then on the money you make is yours to keep.  Ok, maybe it wasn’t a really good joke.  Understanding your break-even point is exactly the same thing.  Let’s say your break-even point is $20,000 per month.  If it’s January 10^th and you’ve already made $20,000 you’ve already covered your expenses and the rest of the money you make that month is PROFIT.

Don’t you want to know when you start making a profit?

Number 1 of the 7 Simple Numbers for Small Business Success is understanding your break-even and how often you want to review it.

Your break-even point is the simplest way for a small business to find out if what they charge for their products and services will cover the actual costs. 

Understanding your break-even point will help you understand the TRUE cost of doing business.  In turn, this will help you price your product so you can meet your expenses.

Why You Need to Know Your Break-Even Point

Understanding your break-even point will help you understand the TRUE cost of doing business.  In turn, this will help you price your product so you can meet your expenses.

Did you know that your break-even point can be used for a bunch of different things? 

1. Evaluate a new product or project to see when you’re the money you invest can be recovered.
2. It can set Your Initial budget – use your break-even point to determine your budget. You’ll know immediately because you’ll be monitoring and controller your costs. You’ll be able to see where your money is going and what needs to change in order to get to your breakeven point faster.
3. Helps determine your pricing strategy – If you’ve set your prices to low you’ll see almost immediately that it will take you longer to get to your break-even point. If you need help determining your pricing strategy check out our (Pricing Strategy) Article

Free Break-Even Analysis Template:  Get our ” Sample Break-Even  Analysis” that lets you not only calculate your break-even point but the best case and worst case scenarios so you always know where you stand.

When and How Often You Need a Break-Even Analysis

I always advise our clients to have this calculation handy….There are a few times that make calculating your break-even point becomes necessary.

1. Starting A New Business

Starting a new business can be rough especially if you’re after funding.  To make sure you know when you’re going to make a profit then start with understanding where your going to spend money and then figure out how much you’ll spend and how much you need to sell before starting.  It will keep your expectations realistic and make the banks happy that you know when profit will start.

2.      Creating a New Product

Want to add new inventory, creating a new coaching package or thinking about adding a new line of products?  Then it’s time to create a break-even analysis to see when the new product or service will make money.  This also helps focus you on the variable costs that are associated with creating and selling the product.  For example, let’s say you are going to sell training to corporations and it’s going to cost additional money to create and execute a solid marketing plan.  You’ll want to know when you expect to be able to pay for it.

3.      Adding a New Sales Channel

Thinking about switching from drop shipping products to carrying inventory?  You should make sure that you complete your analysis to make sure your pricing doesn’t need to change as well. 

4.      Changing Your Business Model

Thinking about switching from drop shipping products to carrying inventory?  You should make sure that you complete your analysis to make sure your pricing doesn’t need to change as well. 

4.      Changing Your Pricing Or Reducing Costs

We live in uncertain times so you may need to look differently at the products and services.  If you’ve reduced costs or if you’ve lowered or raised your prices it might be time to analyze your break-even point.

What is a Break-Even Point

The breakeven point is where the business’s total revenue is equal to its total expenses.  Sounds fairly simple right?  I like to know when a company breaks even for the month as well as a quarterly and annual basis.  I know your asking yourself, why, it’s because that will help you figure out what you can afford next, where your money is going

and….

When you can really pay yourself what you want to pay yourself.

How to Determine Your Break-Even Point

Now that you have the break-even formula it’s time to get real with the numbers check out the formula below.

You have the formula how the heck do you get the numbers.  Let’s find out….

1.      Gather Up Your Data

If you have an accounting system then you should be good as long as your following the 4 Money Rules Every Small Business Owner Should know.  If your finances are in a bit of a mess you might want to go to through the 4 Steps to Organizing Your Business Finances before you try to compute your break even point.

If you do have your finances together then it’s time to list out your Fixed costs.

2.     Find Your Variable Costs

Let’s Find our variable costs so that we can make sure that we have the right number for our break-even.  

If you’re an eCommerce seller and you produce products having the variable cost for the product is sooooo important. You check out how to find your cogs in more detail In What the Heck is Cost of Goods Sold.

Free Break-Even Analysis Template:  Get our ” Sample Break-Even  Analysis” that lets you not only calculate your break-even point but the best case and worst case scenarios so you always know where you stand.

Putting it All Together

Now that you figured out what your Break-even point is you know what you need to get to on an Annual Example.  So with the below example, you need to make $101,538 annually to breakeven.  According to this calculation which you can find in the Break-Even Point Spreadsheet you need an additional $1,538 to get to break-even or you can cut fixed costs of $1,000 to make it.

That’s why it is so important that you understand the breakeven and how it plays the part in your overall business plan.  If you divide the Break even point by 12 you’ll be able to calculate your operating expenses that you need to make every month to break even. 

Let’s get you to profit quicker.

You got this!

Andrea