Breakeven analysis is a tool used to determine when a business will be able to cover all its expenses and begin to make a profit.
For the startup business it is extremely important to know your startup costs. This analysis provides you with the information you need to determine how much sales revenue it will take to pay the ongoing expenses related to running your business.
For example, a startup business owner must understand that $5,000 of product sales will not cover $5,000 in monthly overhead expenses. The cost of selling $5,000 in retail goods could easily be $3,000 at the wholesale price, so the $5,000 in sales revenue only provides $2,000 in gross profit available for overhead costs. The breakeven point is reached when revenue equals all business costs.
To calculate your breakeven point you will need to identify your fixed and variable costs.
Fixed costs are expenses that do not vary with sales volume, such as rent or administrative salaries. These costs have to be paid regardless of sales and are often referred to as overhead costs.
Variable costs vary directly with the sales volume, such as the costs of purchasing inventory, shipping, or manufacturing a product.
The formula for determining your breakeven point requires no more than simple arithmetic. However, it’s even easier than that! Just check out this link for Breakeven Analysis.
Whatever you do, do not forego a break-even analysis when managing your own business.
Although completing a forecast for breaking even might sound complex or difficult, you need to understand that you owe it to yourself, and your business, to understand this simple concept.
Now is the perfect time, if you plan on succeeding in business, to get comfortable with the concepts of a more details financial analysis, including the process of projecting costs and estimating future profits.
Bottom line, a fully prepared breakeven analysis will tell you whether your business concept is a winning or losing proposition relative to the startup capital available.
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