Know Your Break-Even Point
Knowing your break-even point on specific products, services and the overall business operation is the key to strategic planning and maintaining and increasing profitability during the long term.
By Jeffrey Moses, www.nfib.com
Many small-business owners focus on the profitability of their operations rather than spending time determining their break-even point. This is natural because profits are the ultimate essential for anyone running a nonprofit business. However, knowing your break-even point on specific products, services and the overall business operation is the key to strategic planning and maintaining and increasing profitability during the long term.
Whether you're a freelancer operating out of a home office or a business owner with dozens of employees, your break-even point includes not only the total cost of running your business, but also the amount you pay yourself as salary. Your salary is a key essential of your overall operation because without it you could not afford to keep running your business.
Your salary should not be considered profit. It should be included in break-even calculations. Profit is the difference between the break-even point and the amount you charge for products or services.
- Break-even on products, services and projects
Break-even includes the cost of every facet of producing, purchasing, marketing/selling, delivering and providing follow-up or warranty work. Included should be ongoing "hard" costs such as rent/lease, utilities, insurance, debt payments, your salary and employee salaries, etc. Before taking on any new products or services and beginning specific projects, you should calculate your total added costs for doing so. The exercise of determining your break-even point for every product and service provides the basis for maintaining and increasing profitability by setting prices to assure competitiveness, adding new employees, allocating facility space, taking on or reducing debt, adding equipment, etc.
- Comprehensive tool for planning
Knowing your break-even point for various aspects of your business is a tool that enables you to plan for the future with a solid foundation. When you've calculated your break-even point, you know exactly how much you'll make with every sale. Even more than that, you'll be able to very accurately project how many sales you need to make, what you need to do to achieve that level of sales, and even how much you can increase profitability by cutting expenses (adding more efficient equipment, cutting unproductive marketing efforts, etc.). It even allows you to estimate profitability by utilizing economies of scale––i.e., paying less per item of product by ordering more, reducing prices and thereby increasing sales and taking on new lines or adding new services and so on.
The break-even point is a vastly undervalued and underutilized tool. It should be part of every business plan because it is the foundation for accurate decision making. But even if you keep your break-even point to yourself (and why let anyone know unless necessary), you'll have a greater understanding of your own business.