When will I break even? As a small business owner, this is one of the biggest questions you’ll ask yourself. Breaking even is a key indicator of growth and is often the difference between success and failure. Conducting a break even analysis regularly will help you determine fixed costs (like rent) and variable costs (like materials) so you can set your prices appropriately and forecast when your business will reach profitability. This is known as break even point (BEP).
What exactly is the break even point for a business?
This is the stage at which your revenue equalises with costs. Once you know what that figure is, it is then time to review all your costs and your pricing structure at which time you can ask yourself the following questions:
- Are my goods or services priced too low or are my costs too high to reach break even point in a reasonable amount of time?
- When can I expect to break even?
- Is my business sustainable as a result?
Calculating your break even point
We’ve put together a PDF of 5 steps to help you calculate your business’ break even point.
Once you know your break even point you’ll need to determine if your current trajectory is realistic as the result of the analysis may suggest you need to raise prices, cut costs or even both!
Ideally, you should conduct a break even point analysis before starting a business so you’re aware of any potential risk involved. If you’re an existing business we recommend conducting this analysis before launching a new product or service to determine whether or not the potential profit is worth the startup cost.
In addition to startup planning, a break even analysis can also in business’ daily operations and planning.
Break even point and beyond is or should be the goal of every small business owner. Now you have the tools, you don’t have to wait around and speculate. You can project when and how you’ll reach break even point. In turn, this will enable you to make better business decisions and ultimately work smarter and not harder.