When it comes to the decision of Break-even analysis, most business organization and entrepreneurs have this imperceptible feeling about the idea. But the enhancement of break-even analysis has a positive effect on the business plan.
A legitimate and authentic entrepreneur always ensures that break-even analysis is put in place in a business plan. Break-even analysis is so essential to the creation of a business plan; this determines the possibility of a successful business plan.
Break-even analysis is of high importance because it aids in the determination of all the expenses covered in a business; it simply determines when your revenue is equal to your cost. It clearly identifies your cost so as to determine the figures of your planned undertaking with sales. In the long run, you will be specific with the amount of revenue you need to pay your expenses. At the level of breakeven point, there are neither any losses of profit acquired.
Conducting the Break Even Analysis before Starting a business
1- Determine the nature of your Costs
There are several types of costs to be considered during the process of conducting a breakeven analysis. Let’s consider some of the following costs that seem to be obvious amongst all cost
Fixed costs: These are costs that remain unchanged without the regards to the number of items that are being sold. Every cost that you began with, some of which include insurance, rents, tools, and equipment are all referred to as fixed costs because you have to make this expenditure before you begin to sell your first item.
Variable costs: These are costs that occur every now and again, you must implement them with every unit of the item you sell. As the business productivity continues to grow in sales and inputs, you implement labor costs and its likes as variable costs.
2- Setting the most suitable Price
Setting the right unit price; which simply means the amount you intend to bill your customers, is of absolute importance to your breakeven analysis and then, in the long run, it turns out to earn more profit for your business. It is paramount to know your unit price so as to calculate your revenue.
Pricing: Pricing, in the aspect of break-even analysis, is critical, lots of research has to be done in order to balance the equity amongst your goods and the price you sell them to your customers. Ensure to implement a strategic price that will enhance the productivity of your company with an adequate profit.
In conducting break-even analysis, it is essential to consult a professional in the aspect of pricing, they will aid in the area of quantifying both your inputs and outputs for the most suitable price to charge for your products. Where to induce discount and special offers will also be specified.
Use the Breakeven Formula:
To conduct your breakeven analysis using the formula, simply divide your fixed costs by your unit selling price minus your variable costs.
Breakeven Point = Fixed Costs / (Unit Price – Variable Costs)
The result of this calculation will clarify the units of products you have to sell in order to break even. With this, you’ll regain all the costs associated with your production cost, both fixed and variable at this point.