Breakeven Analysis: What Is It & Why It’s Important.
It’s An Essential Business Tool To Best Manage Your Business
Determining how much to charge your customers is based on many factors including:
Understanding what competitors charge for the same or similar products and services.
The degree to which your products and services are superior to what other companies offer.
The extent to which your products and services are more available to consumers (ie., whether you have distribution and/or resources advantages).
And very importantly, the overhead and projected sales volume associated with the things you sell.
Breakeven analysis is a tool that most directly addresses this last point to help you understand how much to charge. It is a mathematical formula to determine your breakeven point based on dividing your fixed costs by the unit or hourly selling price less variable costs. By using this formula, businesses can calculate the minimum sales volume necessary to at minimum, stay in business, and at best to project contribution margins to maximize profitability.
So first, you need to understand your fixed costs. Things like rent, insurance, utility bills, salaries (for non-commission staff), and other costs unrelated to the manufacture, distribution, sales and marketing of your goods and services are expenses you need to pay regardless of your sales volume.
Second, you need to determine variable costs. These are expenses that change based on your sales volume. For example, the cost of manufacturing materials, sales & marketing, distribution & shipping…these kinds of expenses will vary based on the quantity you produce.
Then, with a clear understanding of this overhead, you can determine your breakeven point by applying different selling prices and projected sales volume.
It sounds relatively simple. But the application of this formula can be confusing and working through the different pricing and sales projections can be challenging. But it is an essential tool to help manage your business.
It can be used to determine the viability of your enterprise. It can be used to create charts for budgeting, setting sales goals, for motivating manufacturing and sales teams with performance incentives, for monitoring and controlling costs, and as we noted at the beginning of this article, to help you set pricing for your products and services.
Based in Arcadia, California and serving all of Southern California, at Norm Blieden, CPA, we have the tools and experience to provide most companies with breakeven analysis that can be used effectively for a variety of purposes and to support business operations and growth.
For more information, please call Norm Blieden at 626-440-9511.
Or email him at: email@example.com