5 Easy Steps to Create a Break-Even Analysis

What is the use of the breakeven point?

The breakeven point is one of those vital numbers that can mean success or failure for small businesses. If you are at breakeven, your income equals your costs. You have neither profit nor loss at this point. However, above the breakeven point, every dollar of sales is net profit.

How to use breakeven analysis in financial planning

Breakeven analysis is important in several different situations:

• When planning to launch new products, knowing the breakeven point helps you set the price more efficiently.
• When planning the overall cash and profit strategy for your company, the breakeven point can be used to determine profit points for product lines.
• When planning for funding, knowing your company’s overall breakeven point can help make a case for obtaining a business loan.

Note: A lender or investor may want to see this information in the financial report section of your business plan.

Gathering information for analysis

Before you start analyzing the breakeven point, you will need some information. Let’s assume you are analyzing a potential new product. Prepare a list of all costs and expenses related to that product, including utilities, material and supply costs, machinery or equipment, and labor costs for making the product and preparing it for shipping.

You’ll also need to know two other pieces of information:

• The price range you are considering, starting from $0.00.
• The quantity range you estimate you can sell, starting from zero (0).

Note: You will need to detail both fixed costs and variable costs. Fixed costs are those that you must pay even if you make no sales (like rent and utilities). Variable costs are those that you spend to make, sell, and ship products (like raw materials, supplies, and labor).

5 Steps to create a breakeven analysis

Here are the steps to take to determine the breakeven point:

1. Identify variable unit costs: Determine the variable costs to produce one unit of this product. Variable costs are those costs associated with making or buying the product wholesale. If you are manufacturing a product, you will need to know the cost of all the components that go into that product. For example, if you are printing books, the variable unit costs are paper, binding, and glue for one book, as well as the cost of assembling one book.
2. Identify fixed costs: Fixed costs are the costs necessary to keep your business running, even if you do not produce any products. To determine fixed costs, total the operating expenses of your plant for one month. These costs will include rent or mortgage, utilities, insurance, salaries of non-production staff, and all other expenses. Don’t forget the costs of product design and packaging, prototyping, and possibly patenting your product.
3. Determine selling price per unit: Determine the price per unit at which you will sell your product. This price may change depending on where your breakeven point is.
4. Determine sales volume and unit price: The breakeven point will change as the sales volume for that product and unit price change.
5. Create a spreadsheet: To conduct the breakeven calculation, you will create a spreadsheet or use an existing spreadsheet and then convert that into a chart. The table will plot the breakeven point for each level of sales and product price and create a chart that shows you the breakeven point for all these prices and sales volumes.

Note: You can use Excel or another spreadsheet program to create a chart for the breakeven analysis. SCORE has an Excel template, or you can use this template from Microsoft. You will need someone familiar with Excel to adjust the table to fit your specific case.

Analyzing the breakeven chart

Now that you have the breakeven point, what do you do with this information? You want to find the highest price at which you can sell the product while still making a profit. See what happens when you change fixed or variable costs to see what happens if you reduce them. Perhaps you can increase volume by finding new markets. What happens when production volume goes up or down? All these factors can affect your business’s profits on this product.

Of course,

The break-even analysis does not happen in a vacuum. If you’re creating a new product that no one has seen before, you have no idea about sales volume or when competition might appear. But at least it gives you a way to start looking for the “best” price for your product.

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Source: https://www.thebalancemoney.com/how-to-do-a-break-even-analysis-398032

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