Creating a breakeven analysis
There are so many different aspects you must consider as you are working on starting a small business or trying to manage one. Business finances are an important component of any business and the breakeven is one financial component you need to pay close attention to. The breakeven analysis allows you to see if you are producing and selling products for a fair cost and that you are getting a good return from them. The breakeven analysis can determine where you need to change prices in order to boost profitability for the business.
Every product you have needs to have a chart created that shows how much it costs to produce the product along with the cost you are making to sell the product. Increasing revenue is vital to your business and this comes from having strong documents that show you what you need to change.
What phase is your business is? Are you just getting started or have you been in business for awhile? If you are just getting started, the breakeven analysis is an important document you need to have as it allows you to manage your startup costs better. What this does is tell you how much revenue you have to generate to stay in business and how much revenue you need to build up cash reserves. When the revenue generated covers all of the business costs, this is your breakeven point.
Here are the steps to help you with a breakeven analysis so you can easily create one for your business and manage your startup costs effectively:
1. Variable Unit Costs. The variable unit costs refer to the amount of money it takes to produce one unit or one product. Does it cost you more money to produce the product on your own or will you be able to save money by purchasing it wholesale? There is more than just the purchase of the product but the purchase of all the things needed to create the product like glue, staples, paper, etc. You need to include every single component even if it is less than a fraction of a cent.
2. Fixed Costs. After you create a spreadsheet of all the variable costs, you will turn to your fixed costs. This is the money you pay toward rent and utilities and everything else that allows you to stay in business. Even if you aren't creating products and you buy all of them, fixed costs are always going to be there because they allow you to even operate your business. Salaries and insurance are two other big costs you need to include in your list of fixed costs. Include everything you can think of so you will be able to get the correct amount and know where your breakeven point is at.
3. Set a price. After you have the first 2 columns created, you can then work on setting a price for your product. Base this on the amount you need to cover the expenses and include additional funds that allow you to have a profit. Upon choosing a unit price, you can move onto the next step of the breakeven analysis.
4. Understanding your market. How many products do you expect to sell per month? You need to know your market and know exactly where your sales volume is going to range so you can change prices for the product based on demand and need.
5. Organize. Once you have all the numbers, the last thing you want to do is put it all into a spreadsheet or document where it is well organized and easy for you to read. Excel is great as you can set up the formulas and just work on changing numbers here and there to see how it impacts your bottom line.