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Break-Even Point Analysis For Startups – Formula To Calculate Profitability
A break-even point (BEP) is such an essential phase for a startup. It is the point at which the costs and revenue come in alignment. There is no loss or gain at this point but a close distance from the near million-dollar profit.
According to Investopedia, the break-even analysis is the process of calculating the number of units of a good or service a company must sell to cover all its costs.
A break-even analysis makes predictions of prices and costs, when and how much investment a startup will need to stay in the market. Analyzing the break-even point means calculating the costs in relation to the selling price to understand when a startup will break even. It refers to the point when the invested money will either have been lost or made a profit. To word it another way, through analysis, you reveal when your startup will equally line up costs and profits.
It is recommended to conduct a break-even point analysis before starting up and any time of adding costs. There is more than good marketing for your startup, automation use, security protocols, and DMARC report analyzers to succeed in profit making. Aside from marketing, expenses and finances are also vital for the smooth running of a business.
To ensure your million-dollar idea pays off the profit, follow this step-to-step guide to conduct your analysis.
5 Steps to Conducting a Break-Even Point Analysis for a Startup
It seems like walking with your eyes closed when you don’t know where your startup is going. You might hit an electric pole and doom yourself to getting electrocuted. To prevent this scenario for your startup, open your eyes to calculating the break-even point.
A chance of success or the expected date to enter a successful business phase starts with the break-even point analysis. Before starting the business, calculating, you can do stock and options trading or budgeting for projects, all with the help of the break-even point analysis. Here is how it goes.
1. Identify fixed costs per month
As the name suggests, fixed costs are the independent amount of expenses each month. A fixed cost stays fixed and unchanged regardless of the company’s product volume. Fixed costs can include rent and interest expenses, as well as insurance, legal services, and taxes. Production never influences these costs to increase or decrease. The company’s rents will stay the same irrespective of the revenue.
Here is a list of what your startup’s fixed costs can look like:
- Operating costs (including monthly expenses such as venue rent, insurance, utilities, and telephone costs)
- Salaries and payroll
- Professional service applications such as accounting, marketing, advertising, and legal services
- Real estate taxes and licenses
- Debt servicing, banking, including loan repayments
- Sub fees and permit fees
Fixed costs cover a unit in the formula of a break-even point analysis. You need to accurately determine what you will spend as a fixed cost to analyze the break-even point. An established business knows the unchangeable costs per week, month, and year. Yet, a startup should figure these out through thorough market analysis and research. Fixed costs also depend on the business goals, management plans, and styles. Usually, startups with low fixed costs have lower break-even points than the ones with high fixed costs. The reason is that they have fewer expenses to cover before making a profit. Thus, there will be less output before making an income. When you have specified your fixed costs, the first step is done.
Low initial fixed costs are a very important factor for many of our clients. Technology startups have the advantage that many of them can be validated quickly and relatively low cost by creating a functional version of an MVP. By confronting the market, many questions can be answered, and it doesn’t require huge investments in creating the technology and infrastructure. CEO, ASPER BROTHERS Let's Talk
2. Identify variable costs per unit
Before identifying this point, let’s understand what it refers to. Unlike fixed costs, variable costs have the characteristics of changing regarding production. A variable cost is an expense that varies based on how much a startup/ business sells and produces. The name suggests that variable costs differ depending on how much or less you produce. Variable costs rely very much on the sales or production volumes – so they increase and decrease accordingly.
Thus, the variable cost per unit refers to the sum of labor, material, and additional costs that you will need to launch the product unit. For instance, if you produce food products as part of your restaurant management business, a dish on the menu costs $30, but your labor costs and resource expenses on one such dish make up $20, it means your variable cost per unit, in this case, is $20.
A startup’s variable costs can include the following:
- Production materials and resources
- Direct labor and supplies for production
- Inventory costs
- Sold items cost
- Delivery and service costs
- Employment and commissions
The total variable costs are counted by multiplying the costs for one unit of production by how many of a single unit was produced. For instance, each time it costs you $20 to make one dish on the menu, and you make it 40 times monthly, your total variable cost will be 20X40= $800. Checking this box, too, it is time for the next one.
3. Identify the average price per unit
The next number to get in hand is the average price per unit. This refers to the average price an item is sold for in a set period. The average price per unit is numbered by dividing the total or net profit by how many items are sold.
The average price is the total income divided by the number of units sold; however, if the products are sold in different variants, like size, weight, etc., the “comparable” units change accordingly in the calculation. This number is changeable to the variables sold. It means if you change the volume, you are selling, the average price per unit will change too. Hence, it is a calculation you should make when shifting any selling price according to the sold volumes, like the size, form, packaging, etc.
4. Insert the number in the formula
You have figured out the calculations mentioned above; it is time to perform the break-even point analysis. As simple as it is, the formula goes like this:
Break-even point (units) = fixed costs / (selling price for every unit – variable cost per unit)
Let’s apply the formula to the example we discussed earlier. You make one particular meal at your newly opened small restaurant. Your monthly fixed cost is $900. Your variable costs are equal to $20 for the resources. And one unit of your product costs $30.
breakeven point = $900/($30-$20)= $900/ $10= 90
The calculation concludes that you should sell monthly 90 of the meal at $50 each to break even. Before starting up your incredible business idea, you can compare different selling prices in the formula and strategize the pricing for an early break-even point. Refrain from letting the break-even point attraction make you scare the buyers away.
Remember, it is about something other than selling at a high price to arrive at the break-even point a minute sooner. It is all about selling at a reasonable price both for the audience and the business benefits.
5. Increase the accuracy of the analysis
Even though analyzing the break-even point for your startup seems an easy process with the simple formula, it requires great attention and accuracy. To ensure your calculations are accurate, you must identify the costs. Analyzing is the most substantial part of not making mistakes. Count all the expenses you invest in the product creation and service delivery processes. Don’t forget to count a penny.
Meanwhile, update the analysis whenever you change expense-related matters in your business operations. Regularly analyze the products and services of your business. You should update the calculations every time you add a product or a small particle to an existing product.
Many businesses, especially startups, need an idea of a break-even point. They start producing, launching, and selling without understanding the expenses and incomes. Awareness will save resources. Analyzing your break-even point before the launch is helpful since it gives you a realistic opinion of how winning your startup will be. The budgets determine the chances of success. Proper budgeting will guarantee your business success at the right time. Furthermore, knowing exactly how much you need to spend to earn enough, you will invest the required amounts at the right time.
The strategic price analysis will help identify when to expect no loss or gain and when to set up for revenues. It will provide you with data on the anticipated business stability period. Also, with numbers determined, you will know how much of what, when, why, and whom to market. You will then apply the analysis to your overall business objectives.
A break-even point analysis is a quick and responsible way to figure out how much you must sell of each of your products to arrive at the profit line. Especially in the first stages of the business, analyzing the costs is binding. This analysis is an easy way to get insights into your further business pricing actions. You can experiment with the numbers, shifting different numbers in the formula to understand the best price for your products. This analysis will give you a comprehensive idea of whether you can sell the necessary products, have sufficient resources, and if the prices are reasonable for both sides. You will determine the expected break-even date and set your teams up to fulfill the predictions.
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