The Importance of Breaking Even in Business Finance

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Breaking even is extremely important for all businesses. A business breaks even when it earns enough sales revenues to pay for all expenses. In other words, all costs have been paid, though the business did not suffer a loss or make a profit. The break-even point usually is calculated on a monthly or annual basis. If your business is not at least breaking even, then you immediately must revaluate your business strategy and make appropriate changes.

Basics

To accurately gauge your break-even point, you need to evaluate several factors. First, calculate fixed costs, meaning all of the expenses needed to create one product. If you have a furniture business, then calculate the total cost (e.g., labor, materials, shipping) of obtaining one piece of furniture. Next, calculate variable costs, which increase or decrease as you produce more products. Examples of overhead expenses include - retail or warehouse space, utilities, insurance and office staff, such as an accountant, receptionist or security personnel.

Considerations

Do not be overwhelmed with expenses simply because your business has a lot of them. You must understand how much you business is spending so your business can succeed instead of barely surviving or even failing. Consider working with a certified public accountant to ensure that you calculate all costs.

Price

After realizing how much your product or service costs your business, assess your unit price. For example, if you own a computer repair business, you should know whether you are charging clients enough so that you at least break even.

Your break-even point (number of units you must sell) equals your fixed cost divided by the difference between your unit price and variable unit cost. Use your break even point to establish your pricing structure as well as target sales goals (e.g., need X number of clients each week).

Benefits

Make sure you renegotiate long-term expenses by contacting your suppliers and asking for better deals. For instance, if you operate a spa that is not breaking even, call your supplier of shampoos and conditioners. Ask for different terms, such as getting a 15 percent discount by ordering an extra box or crate. If your supplier is not interested, then research other ways you can get similar materials. You should never rely on just one supplier, distributor or manufacturer.

Potential

If you have an existing business and you want to expand, use break-even analysis to estimate potential profit and calculate necessary sales. In fact, many investors want businesses to include break-even analysis within their business plans so investors can gauge possible returns on their investments. There are many other calculations that you can prepare to strengthen your operations.

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