What is break-even analysis? The break-even point is when your company is not making any profit. At the same time, it is the place in time where your company is not making any profits either. Basically, your company is covering expenditures but not gaining any profits. A break-even point gives you a target of what you need to shoot for to make profits. If you don't know your company's break-even point, you are shooting in the dark and you cannot see your target goal. A break-even analysis is definitely a very important function for your company. Knowing your company's break-even point can help you establish the right pricing and financial strategies. It helps you understand profits and losses and if you can't cover expenses, your company is just losing money.
Knowing Your Company's Break-Even Point
In order to know your company's break-even point, you need to know all of your company's costs. Keep in mind that both variable and fixed costs fit into this equation. Both of these things are what you are paying on a monthly basis. They need to be factored into your breakpoint analysis.
Fixed costs are things that do not change and are due on a regular basis. They do not change even when your sales volume changes. However, fixed costs may change due to contract negotiation. Fixed costs include things like rent and employee salaries.
The pricing of your goods or services is very important when it comes to a breakpoint analysis. Sometimes, companies don't spend enough time developing the right pricing model. This is a grave mistake because pricing directly impacts a company's profit. The right pricing model must be in place in order future leverage business. If you don't have the correct pricing model in place, your company may be selling a lot but not making any profit. With a breakpoint analysis, you will be able to see how to change your pricing.
The Break-Even Formula
The break-even formula is to subtract the total variable plus from your fixed costs. You need to identify all of your fixed costs and then subtract the variable costs, such as technology costs and commission costs. Once you see how variable costs and fixed costs affect your bottom line, you can use this information to modify your pricing model and plan better for budgeting and making profits. With a break-even analysis, you will be able to make more profit and fulfill your company's vision. You'll be taking a proactive stance for your company's financial health. A comprehensive breakpoint analysis will also tell you where and when you need to change costs and pricing. Maybe you need to scale back on the hourly wage or reduce the amount machines currently in operation. A break-even analysis will also tell you if you need to cut back on interest-bearing debt.
If you are uncertain about how to do a break-even analysis, consider investing in some software or hiring an outside financial expert to do this for you. It can mean the difference between thriving or sinking.