Break-Even Analysis
This
type of report is not one that is automatically generated by most
accounting software, nor is it one that is normally produced by your
accountant, but it is an important analysis for you to have and
understand. For any new business, you should predict what gross sales
volume level you will have to achieve before you reach the break-even
point and then, of course, build to make a profit.
For early-stage businesses, you should be able to assess your early
prediction and determine how accurate they were, and monitor whether
you are actually on track to make the profits you need. Even the mature
business would be wise to look at their current break-even point and
perhaps find ways to lower that benchmark to increase profits. The
recent massive layoffs at large corporations are directed at this goal,
lowering the break-even point and increasing profits.
Break-Even Is the Volume Where All Fixed Expenses Are Covered
You
will start a break-even analysis by establishing all the fixed
(overhead) expenses of your business. Since most of these are done on a
monthly basis, don’t forget to include the estimated monthly amount of
line items that are normally paid on a quarterly or annual basis such
as payroll taxes or insurance. For example, if your annual insurance
charge is $9,000, use 1/12 of that, or $750 as part of your monthly
budget. With the semivariable expense (such as phone charges, travel,
and marketing), use that portion that you expect to spend each and
every month.
This Is Not a Static Number
You
may do a break-even analysis before you even begin your business and
determine that your gross margin will come in at a certain percentage
and your fixed expense budget will be set at a certain level. You will
then be able to establish that your business will break even (and then
go on to a profit) at a certain level of sales volume. But your
prestart projections and your operating realities may be very
different. After three to six months in business, you should compare
projections to the real-world results and reassess, if necessary, what
volume is required to reach break-even levels.
Along the way,
expenses tend to creep up in both the direct and indirect categories,
and you may fall below the break-even volume because you think it is
lower than it has become. Take your profit and loss statement every six
months or so and refigure your break-even target number.
