Business Insurance Users

Breaking-even calculations

Making accurate breaking-even calculations is central to careful and successful business ownership. If you are setting up a company you need to do quite a few calculations before you can be sure it is the right move. There are lots of figures and factors that must be taken under consideration and they must be done so realistically and carefully. An inaccurate break even figure which has been arrived at without the proper formulas is not merely problematic - it could actually put the entire venture at risk. Therefore, proper calculations are paramount to your company and this is an area you cannot afford to mess around in.


Before you can begin to start your calculations, you have to first be sure you understand what it is you are working out. We all have a rough idea of what breaking even means but until you have it clear in your head how significant the figure will be to you and your fortunes, you shouldn't start figuring it out. The break-even point can be defined as the point in a company's time line where the sales, revenue and income is, at least, equal to the sum of its total expenses.

Things to Add Up

The first thing to do is work out where those expenses are coming from and, once again, realism and honesty has to be stressed at this juncture. There is simply no room for basing your figures on what you hope happens. Rather they have to represent what is most likely to occur at all times. Costs themselves can be split into two main groups - variable costs and fixed costs.

Fixed costs are all the outgoing expenses which the company has which will remain the same no matter what the level of demand, trade or staff the business is at. So, equipment like computers, rent on any buildings you use and your insurance premiums will all come under this heading. Variable costs, on the other hand will increase and decrease alongside changes in your business. Say, for example, you run a beauty salon and one of your main services is pedicuring. The more pedicures you do the more emery boards you will require from whatever supply company you use, so this cost will increase in relation to your sales and is, therefore, variable.

When you have made an accurate estimation on your costs you can start to think about the price you will charge for your service. This is a huge moment as it will affect the whole shape of your company. There are whole books written about the effect price has on the customer and how you can influence their opinion of the company with a carefully chosen price tag. The main consideration you need to make here is what the price tag says to the customer and where it puts you in the industry. Are you a premium brand, a unique product or a discount item?

Once you have the price and the costs clear you can begin analysing. The most common formula is to divide the fixed costs by the selling price of each unit and then subtract the variable costs from that number. You will now have the amount of units you need to sell in order to break-even.

Breaking-even calculations are a huge part of planning your company's future. Knowing the point at which you are safe is central to good business practices, no matter what industry you are in. Be sure your calculations are accurate and realistic before you go on the market.

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