How To Create a Break-Even Analysis For Your Business

Monday, 1 Jun 2020

Businesses are a risky affair. You cannot be sure of success, and there is no secret formula for guaranteed profits. Often entrepreneurs in Melbourne have to depend on their farsighted approach and insight to move forward.

However, every blind corner can be turned into an opportunity with the help of specific accounting tools that help in forecasting the financial status for every quarter. This is the reason why entrepreneurs hire experienced bookkeeper in Melbourne to determine the break-even point for their business so that they are in control of their finances.

The analysis allows business owners to identify the period when their income becomes equal to their expenditure for the company or any new product. Thus they can make informed decisions related to spending money, applying for loans and pricing their products. Let us understand how to create a break-even analysis for a business.     

What Is Break-Even Analysis?

If you are planning to start a business in Melbourne from the ground up or have taken the initial steps into the first stage of business development, then you must be aware of the break-even analysis.

It is recommended to find a professional bookkeeping company which can help you with the analysis, financial management and keep your books in order. Break-even analysis is defined as the moment when the costs become equal to the income. Thus it means that every dollar earned after this point is considered profit for the business.

It gives you a clear picture regarding the number of products that must be sold to match the expense of production, distribution and marketing. At the break-even point, the company is neither making money nor losing it.

The break-even analysis is usually carried out by bookkeepers when a new business is being launched so that the entrepreneur can fix feasible prices for the products and understand the viability of the business idea. It is also helpful when they create a new product or introduce a new sales channel, such as a new brick and mortar shop in Melbourne.

How To Do The Break-Even Analysis?

The break-even analysis comprises a few significant components that help in determining the result. These are fixed costs, per unit variable cost and per unit sales price. Let us define them here for a clear understanding of these terms.

Fixed Costs

These are the overhead costs which are required to run a business in Melbourne, such as rent, utility bills, taxes, wages and salaries to employees, insurance, etc. These are the costs that have to be borne by the business even if they are not producing any goods or services. They are a constant expense, and the bookkeeper can help you in calculating the monthly fixed costs of your business to determine this amount.

Variable Per Unit Cost

It is the cost of producing one unit of the goods you are selling. It includes the expenses incurred in making the product or buying it from a wholesaler in Melbourne. This expense is not fixed as the cost increases or decreases as per the production volume. It includes the cost of stock, packaging, transport, etc.

Unit Sales Price

It is the amount that the business owner receives on the sale of every unit of the product. The price is decided by the entrepreneur after discussing the financial projections with the bookkeeper. It can change after you reach the break-even point but needs to be determined for the calculation purpose in the first place.

The Formula for Break-Even Point  

Break-Even = Fixed Costs/ (Unit Sales Price – Variable Per Unit Cost)

For instance, the fixed costs of a business are $25,000, and the variable per unit cost is $11, and the unit sales price is $25 so the break-even number of units to be sold will be 25,000/(25-11) = 25000/14 = 1785.72. Thus the business will have to first sell over 1785 units of the product to start earning profits. This will help you in setting the sales targets in the business plan.

Why Is Break-even Analysis Needed?

It can help entrepreneurs in Melbourne in a variety of ways and help them in taking vital business decisions that reduce the risk of losing money and improving revenue. It can be utilised for:

  •  Pricing Products – The price of the unit determined for the calculation will help you to realise the time needed to reach the break-even point. If you have priced the product too low, the timeframe will increase. So you need to decide the best price that will allow you to sustain the business before you reach the break-even point. Your bookkeeper can assist you in determining the correct figur
  • Analysing Fixed Costs – The break-even analysis offered by the bookkeeper will help you to understand if the fixed costs, such as the price of the raw materials or the rent of the leased property is becoming a burden for the business. You can consider a smaller place as your office in Melbourne to make sure that the quality of the products is not compromised and you can start making profits early.
  • Forecasting – If you plan to expand your business and launch a new product or set up a new unit, then the break-even analysis conducted by your bookkeeper will help you in setting goals and determining how many more sales will help you to cover the fixed costs of the new unit. It is best to leave the projection work to the professionals as spending too much time on bookkeeping by the business owner is a common accounting mistake that should be avoided. 
  • Motivation for Productivity – When you have a dedicated goal to achieve with the break-even point in mind, you will be working with a renewed vigour to accomplish the objective as soon as possible. It can help in boosting the confidence of your team and feel more passionate about the business.
  • Make Informed Decisions – When bookkeepers provide the entrepreneurs with all the required information about fixed costs, per unit variable cost and sales price, it becomes easier to make decisions based on facts and figures rather than relying on instincts.
  • Avoid Losses – By conducting a break-even analysis for a new product or new business unit in Melbourne, you can reduce the risk of incurring huge losses as the calculation will help you to avoid a bad idea and focus on the feasible business propositions.
  • Get Funding – Since break-even analysis is a vital part of the business plan, it helps in getting funding from money lenders and banks who want to know the break-even point of the business. It will also help the entrepreneur to decide whether taking the loan is worth it or not.

Conclusion

If you are planning to start a new business or come up with a new product line, you need to utilise the services of your bookkeeping company in Melbourne for calculating its break-even point. It will allow you to assess the success ratio of the project and save you from financial trouble.

 

 

    

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