December 3, 2012

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What’s one of the first things an entrepreneur should ask when starting a business?

One of the most important questions is:

“What’s our break-even point and how will we get there?

Unfortunately, small business owners who can actually answer this question are few and far between. Why? Because few accounting teams understand its importance. Instead, they opt to deliver a boring profit and loss (P&L) statement instead.

Understanding the Most Important Number in Business

“In economics, the break-even point is the point at which revenues equal expenses. In investing, the break-even point is the point at which gains equal losses.”

Here’s a very simple example of calculating a break-even point:

1. Your retail store buys widgets for $15 each (variable costs), marks them up and sells them for $30 (selling price).

2. Your monthly expenses (fixed costs) are $10,000.

3. This means your breakeven point would be $20,000 or 667 units.

The math (break-even point calculator):

$10,000 ÷ (15/30) = $20,000
$20,000 ÷ $30 = 667

Here’s a look at what contributes to your break-even point:

Fixed Costs:

Think about your company’s fixed costs, these don’t change with the quantity of output. It’s money that you will spend even if you sold $0 in products and services. Typical fixed costs include commercial office space rent, business loan payments, software subscriptions, employee salaries, etc.

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