You can get a good idea of how well your business is doing by reviewing your business income statements. You can see the total amounts of your sales, your expenses, and the net profit or loss for your business. You can also use your income statement to calculate the break-even point (BEP) for your business.
The break-even point for a business is when your total revenue equals your total expenses. While a business that's breaking even doesn't have a profit, it's not losing money either. Knowing your break-even point can help you run your operations more efficiently and increase your profits. Below are things to help you determine, calculate, and use your BEP.
1. How to determine break-even. To calculate your break-even point, you'll need to know three things:
- Your sales.
- Your variable costs.
- Your total fixed costs.
Variable costs are those that fluctuate with the number of items sold, such as the cost of materials and sales commissions. Within limits, fixed costs do not fluctuate with sales volume (i.e., rent, insurance, and property taxes).
2. Calculating the break-even point. The calculation involves two steps. First, it's necessary to figure out the amount leftover from each sales dollar after the variable expenses have been subtracted. This is known as the contribution margin. Next, the contribution margin is divided into your fixed expenses to get the break-even point.
3. How to use break-even. There are 5 important benefits of knowing your break-even point.
- You'll be able to manage your business better once you know the sales volume necessary to turn a profit.
- By monitoring your sales, you can accurately predict whether you're on course to reach your profit goals.
- You'll be able to take corrective action more quickly.
- Using break-even analysis, you can calculate the sales volume you'll need to cover the costs of a proposed new product or service.
- If you have a desired profit, you can add it to your fixed expenses and calculate the precise sales volume you need to achieve that targeted profit.
At Summit CPA we offer multiple resources to assist and help your business grow. If you’re ready to get an edge on your competitors? Contact our office at (866) 497-9761 to schedule an appointment with our advisors.