Most business owners are familiar with the big three financial documents:

• Profit and loss statement (income)
• Cash flow statement (or projection, when used for budget planning)
• scale sheet

Those statements are compiled monthly, quarterly, and annually, and each provides useful information about the company’s fiscal health. The savvy business owner consults these statements each month, analyzes the story that is revealed, and makes decisions accordingly.

Now suppose your company plans to launch a new product and you would like to know when the costs associated with developing and launching the product will be recouped through sales of the product at a given price. For this analysis there is a fourth financial document, the Break-Even Analysis, which provides important forecast information.

A break-even analysis is performed when a new product or service is introduced, or a capital improvement is made. The break-even point demonstrates when the sales revenue generated by the new product or service, or payment derived from operational efficiencies following the capital improvement, equals the expenses associated with the launch or improvement. .

Run a break-even analysis to learn how products and services should be priced to recoup your company’s investment, within a given time period, and know when the decision to invest will be positioned for a profit. The break-even point allows decision makers to predict how long to sustain losses and how to anticipate cash flow.

The break-even point is achieved when income = expenses; the business neither makes nor loses money. Business expenses are of two types, Fixed and Variable. Fixed expenses are the standard monthly operating costs. These include office space rental, insurance, utilities, and payroll. Variable Expenses are largely tied to sales: marketing, sales and advertising expenses are the main ones.

When calculating expenses, it is standard to determine the ratio of variable expenses to sales revenue. The Variable Expense amount is divided by the number of product units sold, resulting in the Variable Cost per Unit.

In other words, Variable Costs = units sold times variable cost per unit. For purposes of calculating the Break-Even Point, Total Expenses = Fixed Expenses + Variables (expressed as units sold times variable cost per unit). As always, sales revenue = unit price times number of units sold.

The equilibrium point is reached when:

Price times Units Sold = (Units Sold times Variable Cost/Unit) + Fixed Costs

The difference between the selling price per unit and the variable cost per unit sold reveals the amount that can be applied to Fixed Costs each time a unit is sold. Think of it this way: If your monthly Fixed Costs are $2,000 and the average price of units of your product sold is $2, with an average Variable Cost of $1 each, when you sell one unit, you earn $1 to apply to Costs. Fixed. With monthly fixed costs of $2,000, the break-even point is reached when the business sells 2,000 units per month.

Knowing how many units must be sold each month to break even is essential to the effective financial management of the business. You can also calculate the break-even point in terms of dollars that must be generated each month. In this example, breakeven revenue is achieved at $4,000 in monthly sales, since the sales price is $2/unit and 2,000 units must be sold each month to break even.

A basic understanding of the business financial calculation process and the ability to interpret the data generated are must-have skills for all business owners and Solopreneur consultants. While it is true that the bookkeeper or accountant will perform the break-even analysis in Quickbooks by entering numbers derived from the profit and loss statement, it is always in your best interest to understand how the calculations are made and how to make sense of them. what the financial documents reveal.

When you propose to sell a new product or service, which may be the development of a new workshop to propose and teach or some other intangible service, a Break-Even Analysis will indicate how many units should be sold, the billable hours generated. or classes need to be delivered before production costs are recouped and the new offering is positioned to generate ROI.

Thank you for reading,

Kim