Popular Posts

Thursday, September 22, 2011

Working out the point at which your new business becomes sustainable

How to calculate your break-even point

Your break-even point is the point at which your business is producing enough revenue each month to cover all your fixed and variable costs. Once you reach this point, any additional income generated each month is profit.

Estimating as accurately as you can when you will reach this point is an expected part of your business plan. In other words, you need to work out exactly how much you will need to sell each month, and at what price, to break even.

Before you can work this out you need to determine your start-up costs and monthly running costs, taking into account any fixed costs, such as repayments on loans, salaries, etc, as well as variable costs (costs which will vary depending on how much you sell, such as manufacturing costs, freelance costs, etc). You then need to build in your projections of how many products you will sell, or how much demand you will have for your service, per month.

By comparing your projected monthly revenues against your total monthly costs, you should be able to come up with a point at which you start to move into profit, that is, your break-even point.

Calculating the break-even point will give you an excellent idea of the costs involved in your business and the level of sales you will need to generate to cover your costs, which in turn will affect your overall business strategy.

How much business you have to generate (either number of products or units of service) in a given time to break even can be calculated using the equation below. You will break even when:

Total revenue per month = Total costs per month

Unit sale price × Unit sales = Total monthly fixed costs + (Unit variable cost × Unit sales)
(Unit sale price × Unit sales) – (Unit variable cost × Unit sales) = Total fixed costs

(Unit sale price – Unit variable cost) × Unit sales = Total fixed costs

Unit sales per month = Total fixed costs/Unit sale price – Unit variable cost

Once you know how much you need to sell in one month to break even, you can work out from your sales projections how long it will take for your business to reach this point. You can also see in the table the elements of the equation that you need to change to reach the break-even point sooner.

No comments: