The breakeven point is a critical threshold that any established business or startup should be aware of to achieve profitability.
No business owner starts their company or launches their product hoping to pour money down the drain. While making money may not be your only goal in running a business, it’s probably pretty high on your objectives. To actually start making money it’s imperative to know the threshold when you move from loss into profit – the breakeven point.
The goal of a breakeven analysis is to find the point where your revenues equal your costs. In a world of online tools and Excel spreadsheets, many small businesses take the breakeven calculation for granted. Too many entrepreneurs make the mistake of introducing their product or service to a market without fully researching the total costs involved in starting and sustaining a profitable business.
How can a breakeven analysis benefit your business?
- In setting your product’s price point
- Examining the impact of certain costs
- Assessing how sales will need to grow to justify additional investments into the company
- Identifying areas that are unprofitable and can be trimmed or improved
- Continuing to remain competitive when markets change
How do I conduct a breakeven analysis?
Conducting a breakeven analysis requires careful and diligent examination of costs and prices related to running your business. The key components of the breakeven analysis are:
- Overhead costs
- Variable costs
- The selling price of your product or service
- And, if you are a startup company, you may want to include initial startup costs in the breakeven analysis
The breakeven point can then be measured in by dividing your total fixed costs by your product’s contribution margin (the product price minus its variable costs). While this may be seem like a simple calculation, it can become very complex when a business has a wide breadth of products with multiple revenue streams.
Do you need more help?
Kuberneo CPA has the expertise to help your company fine tune its profit model by routinely conducting this kind of breakeven analysis. Is it time to hire an additional employee and increase overhead costs? Should you sell your product at a higher price? How will finding a less expensive source of supplies affect your bottom line? If you want refine your approach to price and costs management, please come in and talk with the Kuberneo CPA team.