When you are running a business of any size, you are looking to make a profit. But with small businesses, this can take time. Instead of wondering when you will be profiting, plan your sales targets using break-even analysis. Here are some insights into the importance of calculating your break-even point for your business’s growth.
What Is a Break-Even Analysis?
Break-even analysis is a business tool used to determine the number of sales or units that need to be sold in order to cover business costs. Between initial overhead, recurring costs, and emergency costs, you end up spending a decent amount to keep your business running. However, there is a breaking point where your sales profits will overtake your costs. This is the break-even point.
How To Calculate Your Break-Even Point
You can calculate the break-even point by using the following formula:
Break-even point (in units) = fixed costs / (unit selling price – variable costs)
In this equation, fixed costs are items like rent, utilities, insurance, and administrative salaries. The unit selling price is just that—the dollar amount you sell your items at. Variable costs include items such as materials, labor, and storage. Use this equation to find the number of units required to achieve your break-even point. You can take this one step further and calculate your break-even sales by multiplying according to the following equation:
Break-even sales (in dollars) = unit selling price x break-even units
Applications for Your Business
A quality POS software for small business owners can make all the difference in the world, such as the systems we offer here at Business Software Solutions. A point of sale system’s analysis and reporting mechanisms allow you to comb through important sales and inventory data. This can help you calculate your break-even point and see what goals to set as a business. Knowing your break-even point can also help you with cost control, pricing and promotion process, and your overall business plan.
Understanding the importance of calculating your break-even point is one of the best ways to measure your progress as a business. It also gives you a specific metric to watch over time so you can officially know at what point you have reached true profit.
