In business, making good decisions is often the difference between success and failure. Do you rely on gut, the numbers or maybe a combination of both? There are a lot of tools to help, but one of my favorites is a breakeven analysis.
What is it? Breakeven analysis is used to determine when you will be able to cover costs and begin to make a profit from your business investments. You may have used it when starting your business to determine how much sales revenue you needed to cover your fixed costs or overhead.
It's helpful before starting a business. It's just as important as your business grows and projections are replaced with reality -- actual numbers. But it's also helpful when making decisions on a variety of issues - Should I:
Invest in a marketing campaign, website or social media marketing?
Hire additional staff to support our growth?
Outsource a project or task to free up my time for important growth initiatives?
Purchase a new piece of equipment?
Upgrade our computers or phone systems?
Invest in technology (ie, CRM system) to support growth?
While ROI is often used for many of these decisions (will I get a return), you can also use a breakeven analysis to answer the question "When will I begin to make a profit from this investment"?
How to calculate. To do a breakeven analysis, you need to know two things -- the cost associated with your investment decision and your gross profit margin (%).
To calculate the breakeven revenue, divide the cost by the gross profit margin percentage. For example, if cost is $5,000 and your margin is 45%, your break-even revenue is $5,000 /.45 or $11,111. In this case, you will begin making a profit when you hit $11,111 in sales.
My clients find it helpful to look at the break-even point from a number of customers perspective too. You can do this if you know (or calculate) the average dollar sale or transaction for your customers. To determine the customer break-even number, simply divide the revenue breakeven (above) by the average transaction amount. Example: If the average customer sale for the above business is $283, the customer breakeven is $11,111 / $283 or 39.3 (40) customers.
Once you calculate the breakeven, it's decision time. Here's a few questions to ask yourself:
Is the breakeven reasonable and achievable based on the investment you are making?
If the incremental sales include new customers, what is the potential lifetime value of these new customers? How does this impact your decision?
How does this investment compare with past initiatives or others you may be considering now? Business is often about trade-offs and priorities.
Knowing when you can expect to see a profit can be a powerful decision making tool. Use a break-even analysis to help you figure it out.
Joan Nowak is a results-oriented business coach, consultant, speaker, radio host and creator of the Hybrid Business Coaching System for small business owners. For additional information and resources to help you grow your business, visit http://www.HybridBizAdvisors.com. While you are there, subscribe to her monthly eNewsletter for new articles, business tools and special offers.
What is it? Breakeven analysis is used to determine when you will be able to cover costs and begin to make a profit from your business investments. You may have used it when starting your business to determine how much sales revenue you needed to cover your fixed costs or overhead.
It's helpful before starting a business. It's just as important as your business grows and projections are replaced with reality -- actual numbers. But it's also helpful when making decisions on a variety of issues - Should I:
Invest in a marketing campaign, website or social media marketing?
Hire additional staff to support our growth?
Outsource a project or task to free up my time for important growth initiatives?
Purchase a new piece of equipment?
Upgrade our computers or phone systems?
Invest in technology (ie, CRM system) to support growth?
While ROI is often used for many of these decisions (will I get a return), you can also use a breakeven analysis to answer the question "When will I begin to make a profit from this investment"?
How to calculate. To do a breakeven analysis, you need to know two things -- the cost associated with your investment decision and your gross profit margin (%).
To calculate the breakeven revenue, divide the cost by the gross profit margin percentage. For example, if cost is $5,000 and your margin is 45%, your break-even revenue is $5,000 /.45 or $11,111. In this case, you will begin making a profit when you hit $11,111 in sales.
My clients find it helpful to look at the break-even point from a number of customers perspective too. You can do this if you know (or calculate) the average dollar sale or transaction for your customers. To determine the customer break-even number, simply divide the revenue breakeven (above) by the average transaction amount. Example: If the average customer sale for the above business is $283, the customer breakeven is $11,111 / $283 or 39.3 (40) customers.
Once you calculate the breakeven, it's decision time. Here's a few questions to ask yourself:
Is the breakeven reasonable and achievable based on the investment you are making?
If the incremental sales include new customers, what is the potential lifetime value of these new customers? How does this impact your decision?
How does this investment compare with past initiatives or others you may be considering now? Business is often about trade-offs and priorities.
Knowing when you can expect to see a profit can be a powerful decision making tool. Use a break-even analysis to help you figure it out.
Joan Nowak is a results-oriented business coach, consultant, speaker, radio host and creator of the Hybrid Business Coaching System for small business owners. For additional information and resources to help you grow your business, visit http://www.HybridBizAdvisors.com. While you are there, subscribe to her monthly eNewsletter for new articles, business tools and special offers.
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