Let’s face it: we typically don’t start businesses for fun or out of pure goodness of heart, but in order to make a profit. Therefore, it makes sense that one of the first concerns you may have while you are launching a business is breaking even, or getting above the red line and into the black. In the early stages of a business, it is likely that you will be investing more time, money and effort than you are getting out of it. But this ratio should shift as your business begins to take off and you begin to make a profit. By doing a simple break-even analysis, you can easily determine what it will take for your business to gain back what it has spent in start-up costs and to begin to make headway as a profiting entity. Here is all you need to know to make a break-even analysis and assess where your business is and where it is headed.
The One Formula You Need to Remember
While there may be very few computations you need to be able to make as a business owner, it is important that you be able to calculate your break-even point. The ability to estimate your potential business and start-up costs is a critical skill that you will need to get started. Here are some numbers that you should come up with.
•Monthly business costs: The overhead costs of running your business will go into this category. This might include daily expenses such as printer ink and paper, as well as monthly expenses such as rent and electricity bills. Your business insurance will also go into your overhead costs in this section.
•Total monthly revenue: Estimate your total monthly sales figures that will reflect how many goods or services your business is selling on a regular basis and at what cost. Remember to be realistic here, because it is always safer to estimate on the lower side than on the higher side. If your business does more sales in one month or season than during the rest of the year, calculate your total yearly revenue as well.
•Gross profits: Next, you will want to work on calculating your gross profit figure. This number will be represented by the amount that you sell a good or service for minus the cost that you put into making or offering that good or service. For example, if you sell a piece of machinery for $100 and it costs you $50 in parts and labor to create, and you sell 20 of these per month, on average, your gross profit is $50 per item and $1,000 per month. In this case, your average gross profit percentage would be 50%, which is the gross profit of the item divided by the sales price.
With these numbers on hand, finding your break-even point is easy. Simply divide your estimated total yearly revenue by your average gross profit percentage. This will give you a figure that will represent exactly how much you need to make in order to earn back what you are investing into the business. Keep in mind that your break-even figure does not include any cushion for profit or a salary for you, the business owner. It is simply that: the amount that you need to make to break even.
When considering startup costs in addition to regular overhead expenses, break-even amounts can become even more daunting. But if you are just getting started on your business plan, do not let a high break-even number get you down. Once you get through the first few months or a year of owning a business, it is typical for numbers to level off and for a profit to start being attainable. Often, the longer a business has been established, the lower its overhead costs get and the higher its profit margin is able to go.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.