Breakeven and Profitability - What are the keys to success?
Understanding the total costs involved in launching a business and bringing a service or product to market can be a stumbling block for many entrepreneurs. Crucially, this impacts on pricing, with many people in business discovering that they cannot sell enough of their service or product to break even or make a profit.
You need to know how many units you must provide to cover your costs. These units can be products or hours of service.
It is vital for a business to know its break even point, because this will determine pricing and profitability.
Benefits of a Break Even Analysis
For some people in business, they place so much emphasis on the inspirational nature of what they do, and the drive behind it, that they miss out on the essentials.
Someone might feel they have a unique selling proposition, something that will differentiate them in the marketplace and, ultimately, make a good profit. Without a break even analysis, this is not much more than conjecture.
Obviously, there will be an element of educated guesswork at the start but you should back this up with solid research. This means a thorough analysis of your market.
Two basic factors determine a break-even point: anticipated revenue, and the costs of doing business.
Anticipated Revenue
Largely, anticipated revenue is down to market demand: the more people demanding your services or products, the greater your sales volume. The greater the sales volume, the sooner you can cover your costs.
There are going to be several factors affecting this, including:
what you have to offer
the size of your target audience
the effectiveness of your marketing and promotional activity
These different factors will come into play over time, affecting the overall revenue your business can expect to generate.
Of course, then there are your costs to consider.
What are the Costs Involved?
Businesses will have startup costs and fixed and variable costs associated with their day to day running.
Startup costs can have a huge impact on your break even point. The less you need to start running your business, the sooner you are likely to break even
On top of this are fixed and variable costs for a business. Fixed costs can include things like utilities and building rent, which will be there regardless of business activity. Variable costs can run from day to day operating costs to buying stock.
The higher your overheads, the longer it will take you to break even. Another contributing factor will be your pricing strategy.
The higher the mark-up on a product, for example, the higher the gross profit to set against variable costs. However, this must work in relation to the target audience and market conditions..
Decision Making
You calculate your break-even point by dividing fixed expenses by margin. The margin comes from subtracting total variable expenses from net sales.
It is a foundation for making important business decisions.
Your break even point can help determine how you reduce and control your fixed costs. Control these costs and you can reach a lower break even point to go into profit more quickly.”
To strengthen the chances of break even and profitability for your startup, please contact me.