The biggest use for break-even analysis is to determine whether or not your company is breaking even. Here are four ways businesses can benefit from break-even analysis. Whether you're an existing business or just starting out with a new business idea, performing break-even analysis is a great way to learn more about your business’s financial performance and make sure you’re budgeting effectively. Reduce your cost of distribution: Make sure you’re using the cheapest shipping option and the cheapest packaging.What is the purpose of break-even analysis? Spend less on labor: Consider switching to contractors that you pay per job or per unit-that way you can guarantee the variable costs If your order will be too small for bulk discounts, look for other businesses you can form a buying group with. Spend less on raw materials: Try finding vendors with lower prices or discounts for buying in bulk. Here are some common ways to reduce your variable costs: By reducing her variable costs, Maggie would reduce the break-even point and she wouldn’t need to sell so many units to break even. If she keeps falling short of the 500 units needed to break even, she could potentially find a cheaper mug supplier or painters who are willing to take a lesser payment. The higher the variable costs, the greater the total sales needed to break even.įor the example of Maggie’s Mugs, she paid $5 per mug and $10 for them to be painted. Refinance and reduce debt to reduce your interest costsįor more cost cutting ideas, check out our guide of 25 ways to cut costs. Negotiate lower lease payments with your landlord Relocate to an area with cheaper rent or property taxes Here are some common ways to reduce your fixed costs: If you find yourself falling short of your break-even point month over month and feel like you can’t change your prices, lowering your fixed costs can be a solution. Having high fixed costs puts a lot of pressure on a business to make up those expenses with sales revenue. But this can be offset by the increased volume of purchases from new customers. Lowering your selling price will increase the sales needed to break even. If your price is too high, you might be falling short of your break-even point because customers won’t buy at that price. And as much as we think a lower price means more buyers, studies actually show that consumers rely on price to determine the quality of a product or service. If your sales price is too low, you might have to sell too many units to break even. Is your sales price right?Īs you increase your sales price, your break-even point decreases. Here are three questions you can start with. By looking at each component individually, you can start to ask yourself critical questions about your pricing and costs. There are three components to calculating your break-even point. If you’re having trouble hitting your break-even point or it seems unreachable, it’s time to make a change. Then divide that number by the units you’ve sold that month.ĭecisions you can make from break-even analysis If you have any other costs tied to the products you sell-like payments to a contractor to complete a job-add them to your cost of goods sold to find your total variable costs. To find your variable costs per unit, start by finding your total cost of goods sold in a month. You can find your fixed costs and variable costs using your income statement.įor your fixed costs, simply add up your monthly recurring costs (like rent, web hosting, and salaries). Sales price per unit minus the variable costs per unit is also known as the contribution margin. Break-even point formulaīreak-even point = Total fixed costs / (Sales Price Per Unit - Variable costs per unit) Your sales price is just the price that you sell your product or service for. For a coffee shop, the variable costs would be the beans, cups, sleeves, and labor used to produce one cup of coffee. This is the price of raw materials, labor, and distribution for the goods or service you sell. Your variable costs (or variable expenses) are the expenses that do change with your sales volume. These costs will stay the same regardless of whether you sell one unit or a million units. Some common fixed costs are your rent payments, insurance payments and money spent on equipment. Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume. The break-even point is calculated using three values.
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