IT’S NO SECRET that all businesses are in business to make money. This is why every business owner strives to come up with unique measures to ensure that their business rides high above others. There are a number of ways through which you can determine if you are making profits or losses. A break-even analysis is one of the methods you can use to determine your cash flow. If your business is receiving proficient cash flow, then as long as you aren’t spending a ton of money, you’re probably safe. Your break-even, or equilibrium, point is simply a point where the amount of money going out is the same as the amount of money coming in. As long as you make more money than you spend, it means that your revenue brought in by sales can cover the variable and fixed cost of production and still bring in some returns as profits.
A break-even analysis is a very powerful tool that will help you understand the volume of sales that you need before starting to make profits. It is a tool that shows the relationship between your variables, fixed costs and revenues in regard to your sales. When you analyze your business using this tool, you will be able to determine the pricing, optimum production and evaluate strategic options that you have to propel your business to high levels.
As a business owner, you will find the break-even analysis very useful and important. It is a tool that will get you the information you need regarding the performance of your business. The kind of data you gather will be crucial in helping you set the prices for your products and manipulate and control your budget and spending habits. With this tool, you can determine the best price for variable and fixed costs and predict your investment and expansion capabilities. It is also a tool that has been used by many business owners to attract financing.
For you to successfully use the break-even analysis, you need to have the best break-even practices. What this means is that it’s good to know how to lower your break-even point. There are ways that you can use the analysis to lower your direct costs. This is aimed at raising the total margin and minimizing the fixed and variable expenses. You can also opt to raise the prices of your services and goods to realize more profits; just don’t lose sight of the supply and demand curve.
When evaluating your business’ break-even point, it is good to categorize your business’ costs into fixed and variable. The fixed costs are those expenses that are in no way related to the amount of production. This cost will remain stagnant even when you have not produced goods. It includes rent, utilities, etc. Variable costs are those ones that tend to be in motion. They include expenses like production costs, salaries of employees, taxes, interests, and insurance. Variable costs mostly rely on production output and sales.
A good break-even analysis should not be a stagnant figure. You should be in a position to compare the projections to the results attained in real life. This analysis should be recalculated after every three to six months. It can be done through the break-even chart, which is used to show the sales revenue, total costs, and fixed costs. This chart is a very easy way of calculating break-even.
