Who Else Wants To Learn More About Determining Break Even?
Break even sounds like it should be self explanatory. At least the result is pretty much self explanatory. You don't make anything, but you also don't lose. In some business environments, that may not sound too bad. Trust me, long term it is a recipe for failure.
Let's get right down to it. At break even your total revenue is exactly equal to your total cost. And that means every single one of your costs. Starting with the largest ones, right down to the very smallest one. However, as you are planning to sell your business, not losing money isn't where you want to be. You want to know what you can do to make the business profitable.
Total revenue was calculated by multiplying unit revenue by the number of units sold. And if you sell a variety of things at a variety of prices, the method is the same. And in most cases this has all been done for you at the end of every month. If this sounds simplistic, you are right. But there is a reason for this simplistic discussion.
There are really only two variables. One is volume, as in the number of units sold. The other is the price of each unit. In simplest terms, there are a limited number of things you can change to get more revenue. You can sell more units, or you can increase price, or both. So you can decide that you want to increase the price, and sell the same number of units.
When you actually do this calculation you will determine that you can make money before reaching your previous sales unit volume. In other words to break even at a higher price you need sell fewer units. And when you sell the same number of units at the higher price you will make a profit. Pretty simple so far.
When you do the calculation again, but with unit price maintained at your current level, but increasing the number of units sold, you will be profitable. And thanks to the marvels of modern computing you can also work out various combinations of price and volume to discover the outcome. And all of this may suggest the action to take, but is not a substitute for action.
What action is appropriate? Appropriate means that it will work, and will lead you to the desired result. Your assessment of your market is needed to arrive at one or more appropriate actions. It may well be that the market conditions won't allow a higher price. Or that you can't find any way to increase volume. If that is the case you need to review the section on
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If your business is at break even, the other option available to you is to find ways to cut costs. Examine your cost structure carefully. You may have one or more costs that are now fixed costs that could be transformed into variable cost(s). And as you examine your variable cost list, there may be items where the cost can be reduced. As you go through this exercise, and as you contemplate action, redo your break even analysis to determine the impact of each proposed action.
There is no one right answer. However there are some that are better than others.
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