Making and building a business is always complicated and scary. We never know if a business will succeed or fail because even the best businesses can fail. However, that does not mean we cannot create estimations of our success and the viability of the business. By doing a breakeven analysis before building a business, you can find out whether your business will make money or not. This method is mainly an accounting way of seeing whether you can succeed or not with the business. Don’t be scared though because this method will be very simple. A breakeven analysis is also not just limited to businesses, it can also be used for projects or purchases. This way you can make good decisions and avoid future mistakes.
Breakeven Analysis in a Nutshell
A breakeven analysis is a method of determining how much revenue you need to have to cover the costs of a business. Revenue includes anything that makes money from your business while costs range from the costs of the goods to other costs like electricity and more. It is a financial tool that can show whether your business makes money or not and even how much money you may make. As its name implies, a breakeven point is when your income covers your costs but not making any money as profits. The breakeven point shows you much you need to make in order to not lose money. You can use this to determine the minimum amount of sales.
Let’s say you want to start selling laptops online. You can use a breakeven analysis to know how much laptops you need to sell in order to cover costs like storage, delivery, administration, and more. Any point above the breakeven point is the profit that you can make. There are two types of costs that you need to consider, fixed costs and variable costs. Fixed costs are costs that will stay the same regardless of other factors like rent, car payments, wages, etc. Variable costs are costs that change depending on the level of sales like delivery, storage, packaging, etc.
How to Do a Breakeven Analysis
A breakeven analysis can be done pretty easily as long as you have the determination and know-how. It is not that complicated so anyone can do it. Now we will discuss the 5 steps to do a breakeven analysis.
1. Determine your variable costs
First, you have to find out the costs that change with your sales. You need to find out how much you are spending in order to sell a single product. This can be things like packaging, storage, stickers, printing, and more.
2. Determine your fixed cost
Afterward, you need to find out how much costs you have that don’t change. These costs are not affected by sales and you have to pay them anyway. For example, rent and wages are typically fixed costs. These fixed costs are difficult to change, so before you make a business, make sure your fixed costs are as low as possible.
3. Decide on a selling price
Now you have to decide on the price of your products. Don’t worry about this since you can always change it later on. The prices should be set reasonably and be prepared to change them. Your price should be a range of prices which you can accept. This will affect the sales volume in the next step.
4. Decide on the sales volume and its unit price
Now you need to determine your sales volume as well as the right price to use for your sales volume. This will be important in determining the breakeven point. The volume that you set will impact your sell price. For example, if the volume is big then the sale price can be lower and vice versa.
5. Create a spreadsheet for ease of use
Lastly, be sure to make a spreadsheet. Spreadsheets can be difficult to make, but if you have experience or help it can be done. To make things easier, you can also download a template for a breakeven analysis on Microsoft Office’s website. This way you can do everything easier and quicker since all you need to do is just input the data.
Another option if you don’t want to use a spreadsheet would be to do it by hand using a formula. However, this would be very complicated and it is easier to do it with a spreadsheet. The formula is:
Breakeven Quantity = Fixed Costs/ (Sales price per unit – variable cost per unit)Although the formula seems simple, determining the costs can be complicated so it is better to use a spreadsheet for the calculation. But don’t worry since you can find plenty of templates for a breakeven analysis where you only need to input the data.
Methods and Strategies to Lower Breakeven point
Once you know your breakeven point you can determine whether you need to lower it or not. There are great strategies to lower your breakeven point which we will discuss now.
1. Lower Your Fixed Costs
One of the best ways to lower your breakeven point is to lower your fixed costs. This is because fixed costs are typically high and not easily changed like variable costs. This can be things like moving offices or even working from home. You can also decrease employees or wages but this can have negative impacts. However, fixed costs can be hard to decrease.
2. Set a Higher Price
If decreasing fixed costs are difficult, you can set a higher price for your products. Higher prices mean more revenue which can cover the costs better. However, increasing sale prices can decrease your sales volume because fewer people will be willing to buy. So be careful how much you increase.
3. Decrease Your Variable Costs
Lastly would be to decrease your variable costs. This can be like using a cheaper packaging material. Decreasing variable costs can decrease your breakeven point because the costs of selling can be lower. However, the effectiveness of decreasing variable costs depends on the number of sales that you have.
Once you do all of that then you are all set. You can analyze your business plans and models so that you can make good decisions and avoid mistakes or hardships. Breakeven analysis can seem hard and complicated but it is actually very simple, so don’t be worried or discouraged to try. Good luck doing business guys!
Now that you know how to do a breakeven analysis, you can be more effective in business decision-making. You can start making the business that you always wanted. These days you can do this easily because of the internet and many services. One of the best ways of decreasing fixed and variable costs are to subcontract or outsource some parts of your business. This is where AsiaCommerce can help you out. We have an extensive network that can minimize the costs of your logistics and product sourcing. We offer services that range from export imports, procurement and sourcing, logistics, and forwarding. We can help with reselling, sourcing, and dropshipping. Join AsiaCommerce’s membership today to get many benefits for your business!