How To Analyze Your Business BEP (Break Even Point).
It is important to consider your Break-Even Analysis. Break-even analysis is used to determine when your business will be able to cover all its expenses and begin to make a profit. It is important to identify your startup costs, which will help you determine your sales revenue needed to pay ongoing business expenses.
“To calculate your break-even point, you will need to identify your fixed and variable costs. Fixed costs are expenses that do not vary with sales volume, such as rent and administrative salaries. These expenses must be paid regardless of sales, and are often referred to as overhead costs. Variable costs fluctuate directly with sales volume, such as purchasing inventory, shipping, and manufacturing a product.”
The break-even analysis lets you determine what you need to sell monthly or annually to cover your costs of doing business—your break-even point.
To determine your break-even point, use the equation below:
Break-even point = fixed costs divided by (unit selling price minus variable costs)
If you have $5,000 of product sales, this will not cover $5,000 in monthly overhead expenses. The cost of selling $5,000 in retail goods could easily be $3,000 at the wholesale price, so the $5,000 in sales revenue only provides $2,000 in gross profit. So you need to make a sale of $8,000 to break even. The break-even point is reached when revenue equals all business costs.
That point where you recoup you initial investment is your breakeven point. It could be measure in revenue and well as time. The latter is referred to as break even period.
Why is this important?
Be careful, it is frequently mistaken for the payback period which is the time it takes to recover an investment. You may choose to leave it out, but a business plan or financial analysis would not be complete without it. There are some other ways to ascertain a break-even analysis; this is the most standard. This analysis is very important to your investor. Rub it in their faces.