Small business owners often have three things in common: passion, courage, and belief. They love their niche, aren’t afraid to go off on their own, and believe they can sell their products or services to those in need. But in order to be successful, they need a break-even analysis business plan to know just how much to sell.
What is a break-even analysis?
A break-even analysis shows how many units or dollars need to be sold to cover your costs. Anything less than break-even is a loss, and a sustained loss will put you out of business.
How do you calculate the break-even point for your business?
There are two costs to separate: variable costs and fixed costs. Variable costs increase or decrease with sales. They often move in line with a specific percentage or ratio, but can fluctuate due to volume discounts. For example, if you sell $1.25 pencils that each cost you $0.50 to produce your variable costs are 40% of sales. Fixed costs are incurred no matter how many sales you have. Rent is a fixed cost.
The break-even formula is:
Break-even sales = Total fixed costs / Contribution Margin
Contribution Margin = 1 – (Variable Cost / Sales)
Let’s say the pencil company above has fixed costs of $75,000. Their contribution margin (the amount of money they make per item sold) is 60%. $75,000 / 60% = $125,000. This company needs to sell $125,000 worth of pencils to break-even. How many pencils is that? $125,000 / $1.25 = 100,000 pencils.
Are you ready to calculate your own break-even point? Check out this calculator from the SBA.
Why is a break-even analysis important?
A break-even analysis gives small business owners more than belief; it gives them the exact number needed to survive. Knowing ahead of time can help with ordering inventory or hiring staff, while recalculating during the year can show how performance needs to change for the rest of the year.
When to conduct a break-even analysis
Every small business owner should conduct a break-even analysis at the beginning of the year, as well as any time they aren’t making as much money as they thought they would. If you’re just starting out, this will provide your #1 goal to target and track. If you’ve been in business awhile this will help you reevaluate your costs and increase your prices as necessary to maintain your margins.
Tips for beating break-even
Getting to break-even means you’re at zero, but a small business owner needs money to live too! One tip is to build your desired profit into your fixed costs. The break-even point now tells you the sales needed for the lifestyle you want to live.
Another tip is to analyze past months using sales/day. This will tell you which day you tend to break-even each month, which means everything after that is profit. This can help you make decisions with management, incentives, and discounts based on your goals. For example, let’s say you tend to break even on the 25th of each month – that final week is all profit! What are you going to do to make the most of it?
A third tip is managing labor. Wages are often the highest expense for a small business. Whether you treat them as fixed or variable in your specific business, consider how your labor affects your sales. Staff that have nothing to do or don’t produce sales are costing you. How much can you afford?
Working with Haworth & Company, Ltd.
Working with Haworth & Company means you’ll have a trusted business advisor in your corner. We can privately discuss your goals, dig into your business, and help you calculate that break-even point. With monthly financial statements, you can immediately see if you’re on track, and with monthly consulting you can discuss what needs to change. Were there new costs this month that weren’t included in the calculation? Did sales fall behind because staff were out sick? What do you need to do next month to recover? We provide the tools, knowledge, and availability to help you on your small business journey. Do you see yourself in the clients we serve? If so, please contact us or give us a call and let’s get to work.