How to Play the Numbers Game and Win Knowing your break-even point and how to get there will help get your business on the right foot.
By Brad Sugars Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
When is the point where you start making money in your business?
Breakeven analysis is the tool used to determine when you do, and it's vital to understand when a business will be able to cover all its expenses and begin to make a profit.
Very simply, numbers are the language of business, and business truly is a numbers game.
That's why it is extremely important to know the numbers of "The Game" before you start playing it, so you make the best decisions you can.
The importance of breakeven.
Your breakeven point is simply the point in your operations when revenue equals all business costs.
As a startup business owner, you'll quickly discover revenues don't match one-to-one with expenses. Why? Your cost of selling $1,000 in retail goods could easily be $700, leaving you $300 in gross profit available for $1000 in overhead costs. This is important because you now have a difference, and you'll need to make it up somehow.
Numbers you need.
To calculate your breakeven point, you will need to identify your fixed and variable costs. Fixed costs are expenses that don't vary with sales volume, such as rent or salaries.
Variable costs vary directly with the sales volume, such as the costs of purchasing inventory, shipping or manufacturing a product.
This will help tell you the amount of revenue you'll need to bring in to cover your expenses before you make any profit at all.
How to calculate your breakeven point.
There are a few formulas to find breakeven, but an easy one simply divides your costs by your percentage rate of gross profit.
For example, if you're selling widgets with an average gross profit of $3.50 and retail price point of $10, your gross profit percentage is 35 percent ($3.50 divided by $10).
Just divide your estimated costs by your own percentage to determine the amount of sales revenue you'll need to breakeven.
Say you've determined your costs are $6,500 per month ($5000 plus 30 percent to account for any unquantifiable costs you can't or haven't yet identified), and your expected gross profit margin is 35 percent.
That means your breakeven point is $18,571.43 in sales revenue per month ($6,500 divided by .35).
Note this does NOT include any profit (by definition), or even a salary for your efforts.
Making your numbers work.
If your breakeven point is higher than your expected revenues, you'll need to decide whether certain aspects of your plan can be changed. For example, can you lower costs or raise prices.
Play with the numbers and ask yourself if they still work. Then apply them to time -- what part of the month, week or workday will you breakeven?
If you tinker with the numbers and your breakeven revenue still seems unattainable, you may need to rethink your opportunity.
Is that a bad thing? No! Better to lose money on paper than in the marketplace.
Take heart in the fact that you've saved yourself a lot of pain before investing resources in a bad idea and get on with finding opportunities where the numbers will work better for you.
