Nowadays, the focus is increasingly on supporting small businesses and the products and services they offer. When you are at the very beginning and you are just starting a small business, it is realistic to put the profit aside and to work on the quality of services and gaining the trust of customers.
However, when you notice the profit is getting closer to you, it is a good time to think about doing a break-even analysis. This can be very helpful in determining the financial goal that will allow you to cover all costs and still make a profit from your business. Here are five reasons why the break-even point is important to different businesses.
What exactly is the break-even point?
The Break-even point is the point where your costs are equal to the revenue your business generates. In other words – when you are at zero point of income and expenditure. The break-even analysis allows you to understand how you need to act to make a profit. And if we are going to be realistic – that is the only kind of business that can survive.
When you conduct this analysis, you get an insight into how much of your minimum services or products you need to sell in order to pay off all the fixed costs you have. It allows you to plan future activities, such as pricing, hiring new people, the way you should proceed with different types of work… and more. The break-even point allows you to organize your business activities which result in improving your business and increasing profits.
Why is the break-even point important to business?
1. It helps determine the minimum price of the product or service
If you want your business to survive and grow continuously, it is necessary to earn more than you spend. This sounds very simple and logical, but many people enter the business without calculating what the minimum price of the product should be, which will enable them to have a positive income. Break-even analysis requires you to set a minimum product price, below which you should not go if you want the best for your business.
2. It forces you to calculate all variable and fixed costs
The same story applies here as for pricing. It is crucial that you are aware of your variable and fixed costs so that you can manage your business efficiently. A break-even analysis forces you to calculate all the costs, and that way does you a huge favor.
You would be surprised how many people do business “approximately” instead of doing math and determining some of the most important parameters so that they can understand what needs to change and how it is best to do business in the future. Be aware of your expenses so you can determine the necessary income. If you are interested in implementing break-even analysis in your business, you can read more about it at Lernigo.
3. It can motivate you and your workers
You and your workers may have had the impression that some parts of the production process are optimal, as well as that certain services that your company offers are not so important for profit. However, break-even analysis can show that you are wrong and that optimizing some parts of the business can lead to a significant increase in profits.
This can be a huge motivation for you, as well as for your employees, who will have an additional reason to work a little harder and earn more for the company, which will certainly affect their earnings. This break-even analysis can lead to a win-win situation for everyone and significantly support the development of your business.
4. Keeping costs under control
As we mentioned, break-even analysis will require you to calculate all fixed and variable business costs. But that’s not the end of the story. It can also help you keep your expenses under control and not let them take the lead over profits. Break-even analysis is not a one-time thing but should be conducted from time to time in order to have a better insight into how the business is progressing.
Periodic analyzes will allow you to notice if your costs increase, so you will be able to take the necessary measures in time. And there is another option. The analysis can help you detect cost reductions due to the implementation of adequate activities, which can be a guide for your future work.
5. Break-even analysis can be significant if you want to attract investors
If you need investors for your business and you want to attract them, it is necessary to provide them with a break-even analysis of your business. Why? Because every investor needs some kind of confirmation that the invested money will be returned to him. And we don’t believe that investors will take your word for it.
It is necessary to substantiate your claims about profitability with break-even analysis and help investors gain a better picture of the company in which they will potentially invest. If this scares you, we must tell you that there is no reason to fear. In case you have invested hard in your business and see the results of your work, this is great news for you because you will be able to show future investors the fruits of your work.
Break-even point is the point at which your income equals your expenses. Break-even analysis is a great tool for all entrepreneurs, as it can show them current variable and fixed costs and help them understand what the minimum price of their products and services should be. It can also be a great guide for future activities in the company and show which part of the work workers need to focus on in order to make a higher profit.
If you want to attract new investors and show them that your company is doing great and achieving phenomenal results, this analysis can be very helpful. Break-even analysis can have a motivating effect on both you and the employees and lead to much better business, higher earnings, and more effective results.