So let’s look at break even analysis and see just how it works and why it is so important. Simply put, a break even analysis enables a business to determine exactly how much of their product they need to sell in order to either break even or make a profit. It’s a basic equation that divides the amount spent by the unit price charged to determine the number of units required to sell in order to cover expenditures.
The amount spent per unit includes both the total cost of materials and the cost of man hours to produce it. Once you have these amounts you can then plug them into your equation and determine your breakeven point. That way you’ll know exactly how many units you’ll need to spend in total to turn a profit.
Of course, the break even analysis can also be used to determine the viability of other business strategies, including making changes to the materials used, which can affect the individual unit price, or the cost of other investments such as marketing. If you spend more to advertise, you’ll need to charge more per unit to cover your costs. This may be an acceptable risk for your company or it may not make good fiscal sense. Figuring out the bottom line using break even analysis can help you make that decision.
Because markets can change from day to day, it may become necessary for you to make changes to your business methods in order to remain competitive. This is particularly true for SME’s, which can have a more difficult time keeping their heads above water when they are directly competing with much larger companies. This is where a good break even analysis can come in handy.
If you feel that you need to do something to remain competitive, by considering the numbers and determining your breakeven point, you can better gauge exactly what it will take to help your business. You may need to raise prices, switch to using more economical materials or change up your marketing strategy to cut costs in order to maximize your profits.
While figuring out your break even analysis shouldn’t be that difficult, it can be more of a stretch for those who aren’t particularly skilled in mathematics. But fortunately, you don’t have to delve into this world of facts and figure on your own if you don’t feel comfortable with it. A good business coach can help to lead you through these waters and get you headed in the right direction.
For any business, success or failure always boils down to your profits. The more you sell, the better off you’ll be. Break even analysis is your best tool for getting a handle on expenses and making sure that you are getting the most out of your business. Don’t throw caution to the wind when it comes to your business; by running a simple break even analysis today you can be sure to maximize your profits for the long run.