Break Even Analysis Tool
What’s a break even analysis?
The break even point is an important metric for any business. It indicates the point at which sales or revenue becomes greater than costs and the business “breaks even” to start making a profit.
Why the break even analysis is important
Most business have an initial period where they do not make a profit. Depending on the industry, that could be months or years. Sales or revenues are used to cover various start-up and ongoing costs of running the business. Banks and investors know and expect this, but they will also expect you to have some understanding of when you’ll break even. Even if you don’t have banks or outside investors involved in financing your business, a break even analysis will help you understand when you can expect to make a profit and periodic reviews will help you stay on track.
You don’t need to be a CPA to conduct a break even analysis. The SBA (Small Business Administration) has a free tool you can use to conduct the analysis. The break even tool can also be used to help you make pricing decisions and set a price that will cover all your fixed and variable costs and allow you to make a profit.
To get started with the analysis, you’ll need:
Your estimated fixed costs per month
Your estimated variable costs per unit
Your estimated selling price per unit
Your projected unit sales
Don’t worry if you aren’t familiar with these terms. They are explained within the SBA tool and it walks you through each step of the process.