SBA: Plan your business

Finding your break-even point will help you price your products smarter. A lot of psychology goes into pricing, but knowing how it will affect your profitability is just as important. Especially, when making sure that you can pay all your bills. Catch missing expenses It’s easy to overlook expenses when you’re thinking through a new business idea. When you complete the break-even analysis, you have all of your financial commitments figured out, limiting surprises in the future. Set revenue targets After completing the analysis, you will know exactly how much you need to sell in order to be profitable. This sets sales goals for your business. When you have a number in mind, it will be easier to follow through. Make smarter decisions Helps limit business decisions made on emotions. How you feel is important, but it shouldn’t be the base of your business decisions. The break-even analysis will help you start your business based on facts. Limit financial strain Mitigates risk by showing when to avoid a business idea. It helps potential businesses avoid failure as well as limit the financial toll of a bad idea through realistic analysis of potential outcomes. Fund your business The break-even analysis is usually a requirement in order to take on investors or debt to fund your business. It proves that your plan is viable, which will also help you feel better about taking on financing. Getting started Create your break-even analysis with this calculator and determine your business’s break-even point in units using the following formula: Fixed Costs ÷ (Price – Variable Costs) = Break-Even Point in Units What you need to get started: This analysis will help you easily prepare an estimate and visual to include in your business plan. We’ll do the math and all you will need is an idea of the following information. Your business’s estimated fixed costs Your business’s selling price per unit Your business’s projected unit sales Your business’s estimated variable cost per unit Start your break-even analysis Tips and tricks Use the break-even formula. This break-even analysis is based on the foundation of a single product or service. To calculate the break-even point in units we use the formula: Break-even point (units) = fixed costs ÷ (sales price per unit – variable cost per unit). Or in sales dollars, using the formula: Break-even point (sales dollars) = fixed costs ÷ contribution margin. Contribution Margin is the difference between the price of a product and what it costs to make that product. That calculation is: Contribution margin = (sale price per unit – variable cost per unit) ÷ sale price per unit. Calculate multiple products or services. The total fixed costs, variable costs, unit or service sales are calculated on a monthly basis in this calculator. Meaning that adding the total for all products and services monthly should account for all products and services. You may also want to do the calculation individually for each product or service if the products or service sales vary per month. Remember the break-even point is used as an estimate for lender viability and your business plan. It is not intended to 100% accurately determine your accounting or financing since those calculations can only be done after all costs and production have occurred. It’s also a good idea to throw a little extra, say 10%, into your break-even analysis to cover miscellaneous expenses that you can’t predict.