Small Business Consultant
Halton Small Business Centre
This week I’d like to discuss a fundamental analytical tool for business management – the break-even analysis. For years, a staple of my consulting work has been an Excel spreadsheet template and an associated chart. These tools are always readily available on my computer so that I can offer a quick demonstration tor a client. What is the break-even point? The break-even analysis is an equation used to determine the point at which revenue (money in from your sales) covers all of the overhead expenses (costs of operating the business) and all of the direct expenses (costs that go towards each unit of serving customers or making your product). The break-even point is the point at which all of your costs and revenue are equal. Essentially there is no profit, and there is no loss – profit is exactly zero – all of the expenses are paid. The tool is important for calculating minimum sales targets, maximum capacity, and speed to making a profit. The biggest benefit is that it is helpful for deciding if you have developed a strong business idea, with numbers that could eventually lead to success. Calculating the numbers Total fixed costs – Fixed costs are the expenses of operating the business. These could include:
- phone lines
- an employee on salary
- marketing costs
The most important factor in identifying a fixed cost is that the amount spent is not directly related to the number of products sold; the landlord wants the same rent whether you sold one or a thousand units of your product. Selling price per unit – This is simply the specific amount of money the customer pays to purchase one unit of your product or service. Variable cost per unit – Variable costs are the expenses of creating and selling each individual unit of the product. These could include:
- production materials
- food costs
- delivery expenses
- an employee earning a commission
The most important factor in identifying a fixed cost is that for every unit of your product you sell, there is one more unit of expense; if you sell a thousand units of your product you will have to incur the expense of putting a thousand new units in your inventory. What it all means There are two big questions I ask clients to answer based on the results of this chart. Is it possible to sell enough of the product or service in a defined period of time (a day, month, quarter or year) to consistently achieve the break event point?
- How much more must be sold over the break-even point to make the profit expected from the business?
A break-even analysis will help you to set sales targets that lead to your business’s definition of success. Knowing your numbers will allow you to make strong business decisions, will make you feel more confident that you are putting your effort and money into the right business idea, and will convince partners and bankers that you are the right entrepreneur for the job. The Consultants at the Halton Region Small Business Centre are here to help! Register for our Financial Basics Seminar: Understanding Your Financial Statements offered on April 23, 2014. Dial 311 from within Halton Region or 1-866-442-5866, or visit Halton.ca <http://webaps.halton.ca/forms/business_events_seminars.cfm>