As a top virtual chief financial officer with decades of experience, we are often asked about break-even analyses. More specifically, the 2 most frequent questions that usually arise are:
What exactly is a break-even analysis? And does my business need one?
Let’s take a look!
A break-even analysis determines the number of sales a business needs to make in order to cover all variable and fixed costs. In essence, it computes the number of products or services a business must sell in order to pay all expenses and before making a profit. It is calculated via the following formula:
Break-even volume in units = Fixed Costs / (Revenue per unit – Variable costs per unit)
For example, let’s imagine your company manufactures perfume and has the following simplified production numbers:
Fixed Costs: $500,000
Variable Cost per Bottle: $45
Sales Price: $95
Break-even units = $500,000 / ($95-$45) = 10,000 bottles
This means, once you sold 10,000 bottles of perfume, your company would neither lose nor gain money. Instead, you would break-even.
So, why is this important? As a top virtual chief financial officer, our founder, Marilyn Magett, knows it is imperative for all businesses to understand their numbers and have maximum insight into their finances. By understanding your break-even point, you can effectively:
- Set budgets for fixed and variable costs
- Motivate sales staff by allowing them to understand the results of extra sales and the potential for earning more commission
- Decide on the best-selling price by gauging the impact of various selling price points
All of which leads to better business!
Looking to learn more about break-even points or setting financial goals for your business, let our top virtual chief financial officer help! Schedule your free strategy session now or give us a call at 1 (888) 400-2148.