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The break even point for any business is probably the most critical number that goes ignored by most start up businesses. And even if some analysis is done by a potential business owner, it is usually only done on direct costs and not including overheads. However, not only is it important to know for start up business, but it’s a critical number to understand for all business. It is a guide, a minimum standard if you will, that will allow you to understand the point in time that you cross over from loss to profit (or vice versa).
Imagine a slowing economy or a business experiencing decline (not too hard to imagine in the last few years). Knowing your break even point allows you greater understanding and the ability to manage your finances in a more effective way. As things decline you can be acutely aware of the minimum standard that must be reached and also, forecast with more accuracy (and more easily) the losses that may be made if the declining trend continues. This is of most importance if you need to seek external finance to prop up cashflow.
A break even analysis can form the basis of so many calculations:
Break even points can be calculated over any time period. Most people want a critical understanding of their monthly numbers. Therefore, knowing your break even point on a monthly basis. To work out your break even point you need to know the following for each month:
Using these numbers, we can calculate a crude break even point that you can keep in the “basic toolkit” of your business.
