Today in business it’s important to get off to the right start, know what you are doing and what is required to generate a profit. To this end one of the first measures of business performance is to understand what your break-even point is.
The break-even point is essentially your minimum target to attain. Once this target is reached, and assuming your mix of fixed and variable costs hasn’t changed, any additional sales will generate a profit. To understand at a high level what that number is, is important, because it can then be broken down into units, products or service packages that are need to be produced and sold to cover your costs.
By default, it forms the basis of your first and ongoing plans. It’s a disciplines all business owners should master.
Why is Break-even point so important?
- It gives you a point of focus, your minimum financial & operational performance level.
- It provides an insight into the characteristics of your true cost base, which costs are fixed and which vary depending on your level of income or production.
- It provides an opportunity to review what optimum mix of products or services works for your business.
- It highlights the financial performance standards that need to be reached to start making money.
- It forms the basis for key pricing decisions and volume considerations in running your business.
- Its an important consideration when looking at new investment and the opportunities that may bring. (more…)