Many experienced entrepreneurs use a break-even analysis as a primary screening tool for new business ventures.
They won't write a complete business plan unless their break-even forecast shows that their projected sales revenue far exceeds their costs of doing business.
What a Break-Even Analysis Tells You A break-even analysis shows you the amount of revenue you'll need to bring in to cover your expenses, before you make even a dime of profit.
If you can attain and surpass your break-even point--that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses--then your business stands a good chance of making money.
Performing the analysis requires three basic pieces of information that are discussed below.
Analysis on Fixed Costs Generally, the fixed costs in your small business are operational expenses such as payroll and building lease payments that do not change from month to month.To calculate your average gross profit percentage, divide your average gross profit figure by the average selling price.Calculating Your Break-Even Point Once you've calculated the numbers above, it's easy to figure out your break-even point.But you still need to figure out how much profit your business will generate and whether you'll have enough cash available to pay your bills when they are due.In short, a break-even forecast is a great screening tool, but you need a more complete analysis before you start investing real money in your venture.For instance, perhaps you can: --find a less expensive source of supplies, --do without an employee, --save rent by working out of your home or --sell your product or service at a higher price.If you tinker with the numbers and your break-even sales revenue still seems like an unattainable number, you may need to scrap your business idea.Unless you have an accounting background, this might sound complicated to the average business owner.In simple terms, however, conducting a break-even analysis tells you how many units you need to sell to cover all costs.The cost of selling those products could easily reach ,000 at wholesale cost, which only leaves ,000 in gross profits.Your small business reaches the break-even point when revenues from product sales equal all business expenses.