If you don't know where your break-even point of operating your business is, you're in trouble when it comes to forecasting and planning for the future. New businesses, especially in the run-up to launch, have different break-even points than established businesses.
Understanding where you fall is essential to determining whether you're leaving money on the table.
This can make a difference in your retirement planning, expansion plans, and viability if you choose to sell. Choosing a savvy financial planner and tax specialist can help you remain profitable and focus on reinvesting in your business or planning retirement.
Calculating Your Break-Even Point
Budgeting your operations and calculating your break-even point is simple at its core. Determine your operating costs, including both fixed and controllable and find the point where your sales have covered your costs.
To determine your break-even point or your operating cost, first, tally your fixed expenses. These are rent, utilities, supplies – anything that you'd need to have regardless if you produced one unit or fifty.
Your variable costs function as a percentage of units sold or services provided and will rise and fall according to how many units you produce.
Your profit can increase if you control your variables, as producing multiple units typically only involves more manpower and supplies, not additional lease monies, insurance, and so forth.
The breakeven analysis calculator can help you estimate your break-even point, adjusting for fixed and variable expenses.
Am I Maximizing My Business's Profit?
There's a certain "sweet spot" where you've priced your items or services as high as your market will accept without turning away customers while not undervaluing them and leaving money on the table.
Each type of business and market will vary, but completing comparison shops and researching similar businesses should give you an idea of where to start.
There's also a distinct difference between an existing business, with a track record for quality products and great service, raising their prices versus an unknown commodity setting their starting prices at the top of the market rate.
Ideally, you increase profitability by increasing cash flow and managing your controllable expenses. If you're considering changing pricing or cost of doing business, then this calculator may help you determine new price points.
Quantifying My Costs and Profits
If you don't know your operating costs and your per-unit price, then there's no way that you can determine if you're breaking even.
Your profitability isn't just taking in more money than you pay out for invoices. Understanding how many units you must sell or services you must provide before you've covered your fixed costs is critical to determining your price point.
Variable costs act as a function of the number of units sold or jobs completed and typically will go down per unit sold as the number of units sold increases.
Once you've determined what you need to sell in order to operate, then you can forecast things like payroll and supplies to meet your production needs. You can also determine at what point you'll reinvest profits into growing your business or how you'll use your profits to invest for retirement. A comprehensive tax planning service can help.
The operating cost per unit will differ between new businesses and established ones.
First, established businesses won't have the large initial outlay of items, including any equipment and tools needed to produce your product or perform your work. Existing businesses also have an advantage of tried and true "best practices" that include streamlined production and trained employees.
Newer businesses may experience growing pains and may encounter more waste than those that have had time to hone their operations.
Reaching your full profit potential means minding the pennies. This comes in the form of managing costs, as well as reinvesting your profits and planning long-term budgets and forecasts.