A breakeven analysis helps you determine how much your business needs in sales in order to make a profit.
This type of analysis is based on understanding and listing out:
- Your fixed costs
- Variable Costs
- Products and services
- Selling price
- Profit margin
A breakeven analysis is used in combination with a sales forecast when you’re developing your pricing strategy.
A pricing strategy is a key part of your marketing plan and business plan.
We’ve created a free template for you to use to create your own breakeven analysis as well as a sales forecast, marketing plan, and a business plan.
But here’s a quick tutorial on creating your own breakeven analysis.
Fixed Costs
These include costs that you can expect to pay each and every month. These are stable costs in your business that are always there. These are easy to calculate because they’re always the same.
It includes:
- Rental fees
- Taxes
- Loan payments
- Insurance
- Equipment rental
- Payroll
- Product materials
- Accounting fees
- Utilities
Variable Costs
Variable costs are dependent on a number of factors and can be different all of the time. Variable costs include things like:
- Commissions
- Raw materials that shift in price
- Shipping
- Equipment purchasing
- Advertising
- Repairs
- Processing fees
Putting It Together
Gather the following figures to create your breakeven number.
- Fixed costs
- Variable Costs
- Price of products and Services
- Estimated number of products and services you’ll sell
Subtract your fixed and variable costs from the price you’re charging for your products and services multiplied by the number of products and services you estimate you’ll be able to sell.
Estimated # of products & services x Price of products and services = Revenue
Fixed + variable costs = Costs
Revenue – Costs = Profit
This allows you to easily see if your business will be profitable with the price you’re charging and the estimates for how many products or services you’ll sell.
If it’s not profitable you can:
- Adjust your price.
- Sell more products or services.
- Reduce costs.
- Decide that you need to change your business plan.