Why You Should Understand Your Break-Even Analysis

In business we always come across terms such as 'break-even'. For most of us, we just want to get on and do what we're good at but why should we understand a break-even analysis? The level of importance can vary but for those of us with financial goals it is valuable to understand your break-even point.

What information does a break-even analysis provide?

This analysis looks at all of your fixed and variable costs, overhead as well as your direct cost of sales. What this means is all cost information is taken into account.Applying a 'per unit sold' then gives you a minimum number of sales in a period in order to break-even, that is, cover all of your expenses.

Why is this important?

It's important to understand your expenses and how they can increase and vary with the growing sales. Whether it's a product and materials are needed, or a service and you might travel more, use contractors or need other products or services to operate, there will be some increase in expenses as sales increase. Once you understand your expenses in this way, you will be able to set sales goals, monitor performance and get a fair view on your profitability on any day or week just looking at your sales.

At this time of year many look at discounts and specials, especially retail stores. There is a lot more depth in deciding on discounts, what range and the goals. Just starting with a break-even analysis that considers these alongside non-discounted items provides you some insight into the impact on your bottom line. Your pricing needs some guidance to ensure you operate safely and profitably.

Also keep in mind things change. Your team changes, you use different services, your suppliers change their pricing. All sorts of things continue to happen. These can all affect your bottom line and knowing how your pricing and sales targets may need to change will keep you on top of your game.

So including your own income or dividend goals, understanding this break-even analysis helps you and your team work towards achieving goals and be able to focus on strategy and tactics to have a successful and sustainable business.

This week's client story...

Earlier in the week I had quite a chat with a client that sells home-ware products both retail and wholesale. She hadn't consider her break-even point and how the mix of retail/wholesale affected things. Her goal was simply to sell more. She didn't know if each day was a win or if business was taking a financial step backwards.

Now having a break-even point, including a mix between retail and wholesale revenue, provides the client with goals each week. Her team have a minimum to achieve and each day can see if they are heading in the right direction. They have an understanding of how the effort in each area affects them in reaching their goals.

A break-even analysis doesn't have to be a difficult or complex exercise. You'll have a clearer understanding of how your business operates and what your expenses are. You will feel empowered knowing what your sales goals are to both survive, and to achieve your financial goals. Something you should consider if you haven't done so already.