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Understanding Break-Even
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One of the startup business basics is determining break-even – the point where your sales supports your overhead. Beyond break-even lies profitability.
Putting the Pieces Together – Build, Optimize, Convert
And while it is just one of many financial ratios we consider – it is a primary decision tool for anyone launching a new venture. It is the feasibility test.
“In order for the business to hit breakeven, we need to sell 10,000 widgets. Can we realistically expect to sell 10,000 widgets?”
Breakeven = Fixed Costs/Sales – COGS
For example –
I sell hotdogs. My cart, licensing, insurance and marketing run about $600 a month. My food costs per hotdog are $1 and I sell them for $3.
$600/$3-$1= 300 hot dogs a month to reach breakeven.
Further, if I break this down by the number of days I sell hotdogs – 5 days a week (20 days a month) then 300/20 = 15 hot dogs a day to hit break-even.
Most small businesses need to support the owner, so to figure how much I need to sell to make $1,000 a week I add that to the fixed costs. $1,000 a week for 4 weeks = $4,000.
$4,000 + $600/3-1 =2,300 hot dogs a month or 2,300/20 = 115 hot dogs a day. So as a perspective business owner, I need to figure out where I can have my cart to make sure I am selling 115 hot dogs a day.
Obviously, changing the pricing impacts the break-even analysis. If I raise the price of my hot dogs by $1 and assuming all else stays the same – my new break even is $4,600/4-1 = 1,533 hot dogs a month or just 76 hot dogs a day. Be careful though – raising your prices can impact your sales. If your customers feel $4 is too much, they’ll go buy somewhere else. Your pricing needs to be in line with what customers are willing to pay.
Putting the Pieces Together – Build, Optimize, Convert
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