It is important to identify your startup costs which will help you conclude your sales revenue needed to pay constant business expenses. Understanding your break even point will help you with balancing your money from sales, and managing your costs.
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 conclude your sales revenue needed to pay constant business expenses.
- For example, 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 be $3,000 at the wholesale price, so the $5,000 in sales revenue only offers $2,000 in gross profit. The breakeven point is reached when revenue equals all business costs.
- To calculate your breakeven point, you will need to identify your fixed and variable costs by estimating costs of doing business for the first months Fixed costs are expenses that do not vary with sales volume, including rent and administrative salaries. These expenses must be paid regardless of sales, and are often referred to as overhead costs. Variable costs vary directly with sales volume, such as purchasing inventory, shipping, and manufacturing a product. To establish your breakeven point, use the equation:
Fixed costs - variable costs = Breakeven point