What is Break Even Analysis?
A break-even analysis is when you calculate how much of a product or service you need to sell to break even. If you run a paper company, you could determine how many cases of paper you would need to sell every month in order to cover the monthly cost of renting an office space.
Why Should You Undertake Break Even Analysis?
1) To Make Informed Business Decisions
Performing a break-even analysis helps determine when your company is going to be profitable. This allows you to make informed business decisions. For instance, say you’re reaching the end of the month and you’re still far from breaking even. Now, you may want to refocus your efforts on boosting sales or improving your marketing tactics so you can hit your upcoming goals.
2) To Check If A Business Idea Is Feasible
A break-even analysis is also a valuable tool for determining if a business idea is feasible. Say your hypothetical paper company is considering adding a premium paper style to its inventory. For that, you would want to perform a break-even analysis :
– to decide if the increased cost of the product is worth it or
– if you would have to sell it in unrealistic quantities in order to break even.
Before starting a business, performing a break-even analysis is essential. As you crunch numbers, make sure to differentiate between fixed and variable costs. Fixed costs are expenses that never change. While variable costs are expenses that fluctuate with sales. Using the same break-even analysis example involving the paper company, a fixed cost would be the rent because it’s always the same. A variable cost would be paying the wages of delivery workers, as you’re going to need to pay for more deliveries if you sell more paper.
Analyzing business risks is easy with the help of QuickBooks online accounting software. Not only can you use QuickBooks’ break-even analysis calculator, but you can also use the software to track your fixed and variable costs. Knowledge is power, so always remember to do a break-even analysis before making major business decisions.