How To Do A Break Even Analysis
By Tom Egelhoff
The following
article on break-even analysis is from my book, "How
To Market, Advertise And Promote Your Business or Service In
A Small Town"
Break Even
When you have your costs under control you need to consider
a break even analysis for each product or service you provide.
The break even analysis assumes that average variable costs are
going to remain constant for each product or service. This analysis
is strictly internal. It doesn't consider things like competition
or market demand.
Fixed Costs & Variable Costs
Fixed costs are things like the rent or equipment leases.
Variable costs might be monthly shipping charges, cost of supplies,
sales commissions; any expense that changes from month to month.
If you aren't sure which they are, consider them fixed. Remember
other things like insurance, maintenance, payroll, utilities,
automobile, and advertising costs to name just a few.
What's the formula?
Are you sure you're ready for this? OK, stay with me here.
Total profit equals the number of units sold multiplied by the
selling price less the number of units sold multiplied by the
total variable cost minus the total fixed cost. Pretty simple,
huh? If capital P is profit, small p is price, U is units sold,
V is variable costs and F is fixed costs the equation would look
like this:
P=U(p-V)-F
So, assume we have a product we want to sell for $10.00 and
we want to sell 1,000 of them. For this example our total fixed
costs are going to be $7,700 and our total variable costs are
$4.50/unit. Our formula would look like this:
P=1,000($10.00-$4.50)-$7,700=$5,500-$7,700= -$2,200
What happened?
Instead of making money we have just lost $2,200. At break
even the $2,200 number should be $0. We can't make money at 1000
units so how many must we really sell to break even?
We know our fixed costs (F) are $7700, and the price (p) is
still $10.00 and our variable costs (V) are $4.50/unit we do
this:
(p) price minus (V) variable costs divided into (F) fixed
costs or
$10.00 - $4.50 = $5.50 divided into $7700 = 1400 units.
If we maintain our price and expenses we need to sell 1400
units of our product to break even. If we raise our price or
reduce expenses we can sell less.
The Last Word On Breaking Even
Some points to remember. The break even analysis does not
show profitability. It will show some levels of profit at various
levels of sales but sometimes profits must be thrown at company
problems. Even though a product breaks even (or makes a profit)
if all other goods and services don't, you could be in trouble.
This is a guide to get you started. Good
accountants are worth their weight in gold. Take this basic information
to them and have them tailor it to your business.
Once you have the information as to how much it will cost
to keep the doors open and the business viable we can move on
to the next part of the marketing plan.
Would
you like Tom Egelhoff to speak on break even analysis at your
business function or convention?
Click here for
information, topics and pricing.
This article may be reproduced for your group or organization
provided it is not altered in any way and the following is attached:
Used With Permission
©1998-2004 Eagle Marketing, PO Box 271 Bozeman, MT 59771-0271
http://www.smalltownmarketing.com - 406-585-0219
email:tommail@smalltownmarketing.com
Based in Bozeman, MT, Tom Egelhoff is the author of How To Market, Advertise & Promote Your
Business Or Service In A Small Town, and The
Small Town Advertising Handbook: How To Say More And Spend Less.
He is also a seminar and workshop presenter
and trainer. He may be reached at 888-550-6100 or PO Box
271 Bozeman, MT 59771-0271
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