锘? Break-even analysis is a process 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
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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 break-even point is reached when revenue equals all business costs.
To calculate your break-even 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
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The formula for determining your break-even point requires no more than simple arithmetic.
Will Your Business Make Money?
Before you prepare a business plan, you should figure out if your business will break even. Figure out at what point you break even. How many sales until this event occurs?
How can you tell if your business idea will be profitable? The honest answer is, you can't. But this uncertainty shouldn't keep you from researching the financial soundness of your idea. Preparing what's known as a break-even analysis, as well as several other financial projections, can help you determine whether or not your business will succeed.
What a Break-Even Analysis Tells You
Your break-even analysis shows you the amount of revenue you'll need to bring in to cover your expenses before you make a dime of profit. If you can attain and surpass your break-even point -that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses -- then your business stands a good chance of making money.
Many experienced entrepreneurs use a break-even analysis or forecast as a primary screening tool for new business ventures. They won't even write a complete business plan unless their break-even forecast shows that their projected sales revenue far exceeds their costs of doing business.
How to Prepare a Break-Even Analysis
To perform a break-even analysis, you'll have to make educated guesses about your expenses and revenues. Although you don't have a crystal ball, you should do some serious research -including an analysis of your market - to determine your projected sales volume and your anticipated expenses. Your best bet is to invest in a do-it-yourself business plan product to learn how to make reasonable revenue and cost estimates.
You'll need to make the following estimates and calculations when you prepare your break-even analysis:
Fixed costs. Fixed costs (sometimes called "overhead") don't vary much from month to month. They include rent, insurance
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Sales revenue. This is the total dollars from sales activity that you bring into your business each month or year. To perform a valid break-even analysis, you must base your forecast on the volume of business you really expect -- not on how much you need to make a good profit.
Average gross profit for each sale. Average gross profit is the money left from each sales dollar after paying the direct costs of a sale. (Direct costs are what you pay to provide your product or service.) For example, if Amy pays an average of $100 for goods to make lingerie that she sells for an average of $300, her average gross profit is $200.
Average gross profit percentage. This percentage tells you how much of each dollar of sales income is gross profit. To calculate your average gross profit percentage, divide your average gross profit figure by the average selling price. For example, if Amy makes an average gross profit of $200 on lingerie that she sells for an average of $300, her gross profit percentage is 66.7% ($200 divided by $300).
Calculating Your Break-Even Point
Once you've calculated the numbers above, it's easy to figure out your break-even point. Simply divide your estimated annual fixed costs by your gross profit percentage to determine the amount of sales revenue you'll need to bring in just to break even. For example
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In other words, Amy must make $9,000 each month just to pay her fixed costs and her direct (product) costs. (This number does not include any profit, or even a salary for Amy.)
Don't Forgo a Break-Even Analysis
Although creating a break-even forecast might sound complicated, you owe it to yourself to prepare one as one of the first steps in your business planning process. As you can see
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If You Can't Break Even
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