Every small business owner’s goal is to turn a profit.
But it’s not unusual for startups and small businesses to begin with the more modest objective of simply breaking even.
To “break-even” means to generate revenue that is only equal to the amount of costs to run the business. Reaching this level allows the company to continue operating, but no growth is achieved as a result.
Sooner or later a company has to break through this stage. Only a profitable business can expand its reach, improve products and services, and yield a return of investment (ROI) to those that are financially supporting the company.
Valuable Business Insights of a Break-even Analysis
Knowing your company’s break-even point provides a number of valuable business insights.
It gives you a clear idea of where your business stands in terms of profits and losses. You will be able to know just how many products you need to sell to start earning a profit, based on both your fixed and variable costs.
Fixed costs are everything your business requires to operate but has no immediate ties to the actual production. An example of such is your office’s overhead. Variable costs include what’s required to create your products including employee salaries and, of course, production costs.
It will also help you decipher the best pricing strategy to maximize profits.
Calculating the break-even point comes down to simple arithmetic. One easy method is by taking the fixed cost of the business and dividing it by the total difference of your product’s selling price and the variable cost for each unit sold.
Once you gather this important data you’ll be able to chart the direction for your company towards expansion.
Expansion Plans and Marketing Tips
More often than not, moving to the next level in business requires a concentrated marketing effort. To understand why, let’s revisit the basics of what marketing really is: essentially, promoting your business through multiple channels to reach a desired audience.
Whether you create a funny webisode or TV commercial, a well-designed business card or a user-friendly website, it’s your company’s way of communicating to potential buyers that you can provide solutions to their problems.
However, communicating your value proposition effectively requires a keen awareness of customer needs. Then when you establish that connection, and closed a sale — you’ve created an important business relationship.