All business owners need to be aware of their break-even point \u2014 that is, the number of units they need to sell in order to cover their operating costs.<\/p>\n
Once you\u2019ve reached your break-even point, it\u2019s time to celebrate: your business is no longer in the red, and you are officially earning a profit.<\/p>\n
This article will show you how to calculate your break-even point so you can make wise business decisions that support greater growth.<\/p>\n
Entrepreneurs who attempt to run a business without knowing whether<\/em> or when<\/em> they\u2019ll be profitable probably won\u2019t be in business long.<\/p>\n Knowing your break-even point comes in handy whenever you\u2019re making plans to invest in your company\u2019s growth, or making a decision that will have an impact on profits (i.e. a cost-benefit analysis).<\/p>\n Another key advantage of knowing exactly how much you have to earn to start generating profits is improved accuracy of your budgets and forecasts.<\/p>\n The first step to calculating your break-even point is to list the predictable, ongoing monthly expenses required to run your business.<\/p>\n Examples of fixed costs include:<\/p>\n Do the best you can to include the most accurate numbers on your break-even spreadsheet \u2013 and be sure to add an additional 10% to cover unforeseen miscellaneous expenses.<\/p>\n You\u2019ll also want to take into account the business expenses that vary month to month. In order to be as precise as possible, calculate an average monthly cost by tracking your variable expenses over a two to three month period.<\/p>\n Examples of items you\u2019ll want to include monthly estimates for are:<\/p>\n Based on your fixed and variable monthly costs, you can now determine how much you need to sell in order to reach your break-even point.<\/p>\n To find the break-even point for any product or service you offer, enter the following numbers in the formula below:<\/p>\n Fixed costs\u00a0<\/em><\/strong>\u00f7 (unit sales price \u2013 variable costs)<\/p>\n As an example, let\u2019s calculate the break-even point for a web designer offering fixed rate website packages priced at $5,000\/each.<\/p>\n Fixed operating expenses: $10,000 $10,000\/($5,000 \u2013 $1,000) According to this calculation, the web designer would need to sell 2.5 website packages to break even and start earning a profit.<\/p>\n In order to improve profitability, the designer may decide to cut expenses, switch to lower-priced business service providers, raise her rates, or try to sell her customers new \u201cadd on\u201d services.<\/p>\n To ensure you\u2019re always making business decisions based on the most accurate, up to date info, make it a habit to update your break-even analysis each quarter.<\/p>\n Now that you know your company\u2019s break-even point, what will you do to increase your small business\u2019s profitability today?<\/p>\n","protected":false},"excerpt":{"rendered":"What are your fixed costs?<\/h2>\n
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List your variable costs<\/h2>\n
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Try this simple break-even formula<\/h2>\n
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\nVariable expenses\/package: $1,000
\nCurrent sales price: $5,000\/package<\/p>\n
\n$10,000\/($4,000) = 2.5<\/p>\nFinal thoughts<\/h2>\n