Breakeven point and its importance for small businesses

If you have recently started a small business and you aren’t aware of the break even point or its importance then perhaps you need to start all over again (or at least acquire first hand knowledge of Break Even point). Break Even point is quite effectively explained by the alternative phrase used to describe breakeven point i.e. “no profit no loss”. As the name suggest, it is the point when business is making enough sales to cover its expenditures, not more not less, just as much as required to meet the expenditures. Reaching to the break even point must be your first goal. Breakeven point is helpful in designating the minimum number of sales that you must make, in order to be able to carry on. Aiming to get to your breakeven point is a more realistic goal than expecting big fortunes in the early days. Remember that it is the business with more positive, yet realistic outlook that manages to survive in the longer run.

In most cases, it’s not really possible to get to the breakeven point in early days; therefore you must start only when you’ve got enough funds to keep running the business in loss for some months because even the most amazing business ideas take time to transform into a lucrative enterprise. Besides no matter how much you love the idea, it must be able to start paying for at least its expenses, sooner or later. Knowing the breakeven point will also make it possible for you to evaluate your performance and progress on monthly basis.

While it sounds quite simple, figuring out the accurate breakeven point is not simple math, mainly because you don’t have any accurate numbers to do the calculations. Two terms you’ll often hear when there’s a discussion about breakeven point, are fixed costs and variable costs. Fixed cost includes the monthly salaries, business equipment, rents or utility bills. Calculating fixed costs of a business is not difficult, however determining variable cost is kind of tricky as it changes with the quantity of production or the amount of business activity. You should also take into consideration the overhead expenditures along with the more obvious ones. Another thing to look out for, when calculating breakeven point is to determine unit price, because that is what will actually decide the total revenue and the number of sales you need to make in order to get to the “no profit no loss” point.