Starting a new business is exciting, scary, rewarding, and exhausting. Generally, in the beginning you are doing it all: sales, marketing, technical, inventory, bookkeeping and everything in-between. Calculating the breakeven point is not the first or even the last thing an owner thinks about when launching a business.
Knowing your breakeven point ensures your business will have realistic monthly targets and contingency plans to anticipate times of shortfall. It also reduces financial uncertainty and unnecessary struggle in the early days of a business.
What is a Breakeven Point (BEP)?
BEP shows the point at which the business turns from a loss to profits.
Calculating a breakeven point for an early stage business is more difficult due to the limited amount of ‘actuals’. The more accurate your actual numbers are for expenses and revenue, the better a business owner can work towards reaching breakeven sooner.
How to calculate your BEP
- Always use actual amounts where possible rather than estimates.
- By using actuals you are more likely to ensure the expense numbers are correct. For example, knowing you need $1000 per month to cover your expenses allows you to create a plan of action to reach this specific target.
- Use a ‘valley’ month as your time span.
- Generally a business will have peaks (periods of higher revenue) and valleys (periods of lower revenue). If you calculate a breakeven over a 12-month period you may underestimate the amount needed during the valley periods. Using a ‘valley’ month will ensure that you cover all your expenses, no matter what stage you are in.
- Start with your fixed expenses.
- Examples of fixed expenses are rent/lease, insurance, amortization, interest expense, property taxes, and depreciation.
- Don’t underestimate variable expenses.
- Examples of variable expenses are payment processing fees, commissions, and supplies. Over time, you will be able to better estimate your variable expenses, but during your company’s early stages, the easiest way to determine the variable expenses is to tie it to one unit of sales.
- Watch out! It’s easy to overestimate revenue.
- Most companies will overestimate the amount of sales they expect to have in a month. Be conservative when calculating this, to avoid setting goals that are too lofty for your early-stage operations. You can always adjust these numbers later when things stabilize and/or pick up. Again, use one unit of sale as your benchmark to estimate what is required in terms of time and resources.
Ultimately, there is no one-size-fits all way to calculate your breakeven point. In fact, calculating various breakeven points for different scenarios is the best way to prepare for both the worst and best cases. Most importantly, this process helps you identify a specific target, which then makes it easier to visualize and break the goal down into tangible action steps.
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