What is a break-even analysis? The break-even point is the point when your business’s total revenues equal its total expenses.
After the break-even point, any additional sales will generate profits.
A break-even analysis is a critical part of the financial projections in the business plan for a new business. Financing sources will want to see when you expect to break even so they know when your business will become profitable.
But even if you’re not seeking outside financing, you should know when your business is going to break even. This will help you plan the amount of startup capital you’ll need and determine how long that capital will need to last.
In general, you should aim to break even in six to 18 months after launching your business. If your break-even analysis shows that it will take longer, you need to revisit your costs and pricing strategy so you can increase your margins and break even in a reasonable amount of time.
In this situation, a break-even analysis can help you calculate how different scenarios might play out financially. For instance, if you add another employee to the payroll, how many extra sales dollars will be needed to recoup that additional expense? If you borrow money, how much will be needed to cover the monthly principal and interest payments?
A break-even analysis can also be used as a motivational tool. For instance, you can calculate a monthly, weekly, or even daily break-even analysis to give your sales team a goal to aim for.
Do you need help completing your break-even analysis? Connect with a SCORE mentor online or in your community today.
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The sales forecast is the key to the whole financial plan, so it is important to use realistic estimates. Download SCORE's Sales Forecast template.
