H3>What is a Break-even analysis?
A break even analysis determines how much profits you have to make in order to cover total costs of your business. For example if it takes $2,000 to cover costs of your business such as rent, inventory, insurance and more for that month, you would have to make $2,000 in revenue just to break even. This is your break even point. If you make more than your break- even point you make a profit, if you make less you have a loss.
Calculating your Break-Even Point
As an entrepreneur your goal is to create a successful business that produces a profit. By determining your break even point, you will have an idea of how much you have to sell in order to break even. Your business will have to exceed your break even point in order to make a profit. According to the Women’s Business Center the following formula is used to determine your break even point.
Fixed Costs– Fixed costs are standard costs of your business that remain the same every month. These costs include rent, office equipment, insurance, business license fees, employee salaries and more. These costs remain the same regardless of how much or how little you sell.
Variable Costs– Variable costs are costs of your business that are subject to change every month. These costs can fluctuate in relation to changing seasons, advertising and sales. For example if you own a gift shop you will probably spend more on advertising around Christmas. Advertising costs are subject to change each month, therefore it is a variable cost. Other variable costs include office supplies, temporary workers, sales commissions and shipping and delivery.