How To Do A Break-Even Analysis For Your New Business Idea
July 25, 2018
0 minute read
You are having a business idea and plan to open an online store on Shopify or another platform, you have to calculate carefully to not lead to losses in business. You should make an informed decision to minimize your risk by conducting a break-even analysis first.
Doing a break-even analysis prior to venturing out is a good idea to help you avoid some risks and losses. Find out how to go about it with the following information.
Defining break-even analysis
A break-even analysis based on fixed and variable costs and your product’s selling price. It is the way to calculate how many units you will need to sell to pay for your necessary expenses before making a profit.
This step can be done at the business planning stage and it seems to be a part of your marketing plan. Knowing the break-even point helps you set a better selling price and realistic sales goals.
The formula below helps you calculate your break-even point exactly:
Break-even = Fixed costs/ (Average price – Variable costs)
Fixed costs include expenses like salaries, office space rent, utilities, advertising, insurance, and tax. In other words, fixed costs are the permanent expenses.
Variable costs include goods sold, inventory and cost of goods sold. This expense is directly proportionate to the number of units sold.
Key steps in a break-even analysis
There are three main steps in conducting an accurate break-even analysis.
Understanding the concept and key terms and definitions involved.
Gathering all input data and ensuring that it’s reliable. You must make sure that you don’t miss any major or minor expense.
See how each element in the equation affects the outcome by plugging the data into the formula or a template and refining the results when trying out the different combinations of data.
Lower your point of break-even with the important considerations.
Remember to calculate carefully in order to get the best results in business.