This applies equally to adding new online sales channels, like shoppable posts on Instagram. Otherwise, the financial strain could put the rest of your business at risk.
For example, if you’ve been selling online and you’re thinking about doing a pop-up shop, you’ll want to make sure you at least break even. Adding a new sales channelĪny time you add a new sales channel, your costs will change-even if your prices don’t. Even if your fixed costs, like an office lease, stay the same, you’ll need to work out the variable costs related to your new product and set prices before you start selling. If you already have a business, you should still do a break-even analysis before committing to a new product-especially if that product is going to add significant expense. Not only will it help you decide if your business idea is viable, but it will force you to do research and be realistic about costs, as well as think through your pricing strategy. If you’re thinking about starting a new business, a break-even analysis is a must.
There are four common scenarios when it helps to do a break-even analysis. More than that, if the analysis looks good, you will be more comfortable taking on the burden of financing. It’s usually a requirement if you want to take on investors or other debt to fund your business. Fund your businessĪ break-even analysis is a key component of any business plan.
Instead, you can be realistic about the potential outcomes. It will help you avoid failures and limit the financial toll that bad decisions can have on your business. Limit financial strainĭoing a break-even analysis helps mitigate risk by showing you when to avoid a business idea. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you. Successful entrepreneurs make their decisions based on facts. How you feel is important, but it’s not enough. If they feel good about a new venture, they go for it. Make smarter decisionsĮntrepreneurs often make business decisions based on emotion. When you have a clear number in mind, it will be much easier to follow through. This will help you set more concrete sales goals for you and your team. Set revenue targetsĪfter completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will limit the number of surprises down the road. When you do a break-even analysis you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a small business idea. Doing a break-even analysis helps you do that. You still need to cover your fixed costs like insurance or web development fees. When most people think about pricing, they think about how much their product costs to create. You need to make sure you can pay all your bills. A lot of psychology goes into effective pricing, but knowing how it will affect your profitability is just as important. Price smarterįinding your break-even point will help you price your products better. There are many benefits to doing a break-even analysis. Variable Costs: Expenses that fluctuate up and down with sales.Fixed Costs: Expenses that stay the same no matter how much you sell.There are a few definitions you need to know in order to understand break-even analysis. Anything you sell beyond your break-even point will add profit.
Or how many hours of service you need to sell to pay for your office space.
Learn More: How to Conduct a SWOT Analysis for Your Businessįor example, a break-even analysis could help you determine how many cell phone cases you need to sell to cover your warehousing costs. When you’ve broken even, you are neither losing money nor making money, but all your costs have been covered. What is break-even analysis?Ī break-even analysis is a useful tool for determining at what point your company, or a new product or service, will be profitable. Put another way, it’s a financial calculation used to determine the number of products or services you need to sell to at least cover your costs. It’s a crucial activity for making important business decisions. If you run a business-or you’re thinking about starting one-you should know how to do a break-even analysis. A break-even analysis will tell you exactly what you need to do in order to break even and make back your initial investment. As the saying goes, "You have to spend money to make money."While that's not always true, there is one very effective way to lower your risk: do a break-even analysis.