Breakeven Analysis – Know at What Point Your Product or Service is Profitable

July 23, 2013

breakeven1A breakeven analysis is a detailed breakdown of a business. It outlines exactly how much it costs to make a product or to provide a service. It then outlines how many items need to be sold to pay for all of the company’s expenses.

Depending upon the nature of your business, you may want to create a plan based upon a week, a month or a year. Most companies opt to do this plan on a monthly basis. This choice is often made because most of their expenses have to be paid monthly.

When creating this document, it is important to go into as much detail as possible. You should try to include every expense that is incurred during the manufacturing process. This means that you will want to know everything from the price of all the materials to the amount it costs to ship the item out.

Furthermore, the detailing should extend to all expenses. Companies often remember to include the big expenses like rent or insurance, but fail to think about the small incidentals like paper for the copy machine or ink for the printer. A prime example of this is the company that includes its car payment but forgets that the plan should also mention items like regular maintenance, insurance and gas.

If your business requires employees, their cost and expenses need to be listed as well. Within your calculations, you will need to include any taxes and/or benefits that you need to pay on behalf of your employees.  Additionally, if you intend to provide uniforms or other operational items for your staff you will need to list the cost of purchase and cleaning (or maintenance) for each of these items.

Breakeven Analysis Adjustments

Many individuals that write a breakeven analysis discover that they are not reaching their breakeven point in the projected amount of time. This is sometimes due to the fact that the writer failed to list all of the company’s expenses. This does not meant that the breakeven point is not achievable, it simply means that the writer needs to do some adjustments. They need to re-examine their expenses and then readjust their report accordingly.

Another reason for adjustment to this document could be that the price of your materials have changed. You may have included them in your report, but did not predict that they would increase in price. This situation can also be attributed to seasonal changes. For example, your air conditioning bill will be far more expensive during the summer as will the heating bill in the winter.

If you are planning to set up your own business, make certain that part of your preparations include making an all inclusive breakeven analysis. And remember, as with most documents, this one needs to be flexible.

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