One of the keys to the success of any business is a good break-even point (BEP) analysis. This analysis can decide the viability and sustainability of any business. It can also become a guide to ensure that the business can avoid unnecessary financial problems. Having an accurate BEP analysis can effectively serve as a baseline for the most crucial decision making activities for a business to successfully operate.
- List your fixed costs. The first phase in arriving at your business’ BEP is to determine and finalize all the fixed costs the business will accumulate in a monthly period. Fixed costs are the non-variable or non-changeable expenses needed by a business to operate. Examples of these are the utilities, salaries, insurance premiums, and office space rentals. For an example, let’s assume that your total fixed cost per month is $20,000.
- List your variable costs. The seconds phase in creating an accurate BEP analysis is to list down all your variable costs. Variable costs are expenses relevant to the product or service your business sells on a per unit basis. For example, if your business were selling chocolate bars, then some of your variable costs would be milk, sugar, cocoa, and the wrapper. For this example, let’s use $15 as your variable cost per unit.
- List your gross revenue. The third phase in the process is to list down your gross revenue on a per unit basis. This is the total cash that people pay you to purchase your product. In this case, let’s assume that people pay you $30 for a single chocolate bar.
- Compute the gross profit margin. To arrive at your gross profit margin, you will need to subtract your variable costs from your gross revenue per unit. For example, if you sell your chocolate bar for $30 and your expenses per unit total to $15, then your gross profit margin is $15. To convert it into percentage terms, just divide $15 by $30 and you should get a 50% gross profit margin.
- Compute your BEP. Now that you have all the data in place, calculating the BEP should be easy enough. To arrive at your BEP, just divide you total fixed monthly cost by your gross profit margin per unit. In this case, let’s use the previous examples we listed down. Our total fixed monthly cost is $20,000 and our gross profit margin is $15. Divide $20,000 by $15. You should arrive at 2,667 rounded off. This means you will need to sell around 2,667 chocolate bars a month to reach the BEP. Now that you know your BEP, all you have to do is sell more units than what is indicated on the BEP and you should be fine.
In any new business, the first thing you should do is computing your total financial projection for the business. This should be done through researching the competition and assuming the varied costs you will incur in preparing the product or service and operating the business. Preparing a financial projection with the BEP indicated clearly is necessary to see if your business is viable and sustainable.