Break even – Key Tips On Managing Break-Even

The usual question entrepreneurs get asked by investors’ is “what’s your break-even point?”

Most will be able to give the answer and will understand it as when sufficient revenues are achieved to cover all costs and profitability is reached.

In simple terms, it’s the volume of sales required to start making profits and this can be expressed as the number of units sold to cover both variable and fixed costs. Here is how you calculate break-even volume:

Break-even volume = Fixed Costs / (Contribution Per Unit),  where: Contribution per Unit = (Revenue less all variable costs) / (Number of Units)

I am not going to cover any technical aspects of break even, since there are enough articles written about break-even points and how to calculate them given different variable and fixed costs. Instead, I set out some key points for entrepreneurs when considering how to break even.

1.  Set the right price – this is critical to any business plan and if it’s too low, you’ll have to sell a lot more and won’t impress any investors’. If the price is set too high, the volume may be lower but it may not be sustainable.

2.  Get the right time frame – getting to break-even as fast as possible should be the target but not easily achieved. Expect to break even within 2 years for most businesses and for ones with high start-up costs the time frame will be longer.

3.  Be careful with fixed costs – keeping fixed costs such as premises, set up, salaries, support services etc will help break-even faster and easier. Higher fixed costs mean that a business can be prone to losses when sales have a down turn.

4.  Manage variable costs – these are the costs that are directly related to the sales and have to be carefully managed on a day-to-day basis. Negotiate with key suppliers to get the right costs since increasing the margin per unit can dramatically reduce your break-even point.

5.  Get the niche right and cross sell – if you can target niche markets and add complementary products to your main product, you will reduce your break even point significantly. Think Apple or BMW!

The main objective should be to reduce your break even point and to achieve higher profits. The above tips are to manipulate the key components of the break-even formula to the benefit of your business.

Also, don’t forget that there could be multiple break-even points in the life of a product as new versions come out and more costs are incurred to bring out these new versions.

To be on top, a business must focus on break-even all the time.

[Contributed by Asoka, Independent Finance Director and Management Consultant based in London. He works with growing companies as their part time Finance Director and is the Founder of AKCA Consulting, which helps companies improve their financial health.]

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

You have reached your limit of free stories
Become An Inc42 Plus Member

Become a Startup Insider in 2024 with Inc42 Plus. Join our exclusive community of 10,000+ founders, investors & operators and stay ahead in India’s startup & business economy.

2 YEAR PLAN
₹19999
₹7999
₹333/Month
Unlock 60% OFF
Cancel Anytime
1 YEAR PLAN
₹9999
₹4999
₹416/Month
Unlock 50% OFF
Cancel Anytime
Already A Member?
Discover Startups & Business Models

Unleash your potential by exploring unlimited articles, trackers, and playbooks. Identify the hottest startup deals, supercharge your innovation projects, and stay updated with expert curation.

Break even – Key Tips On Managing Break-Even-Inc42 Media
How-To’s on Starting & Scaling Up

Empower yourself with comprehensive playbooks, expert analysis, and invaluable insights. Learn to validate ideas, acquire customers, secure funding, and navigate the journey to startup success.

Break even – Key Tips On Managing Break-Even-Inc42 Media
Identify Trends & New Markets

Access 75+ in-depth reports on frontier industries. Gain exclusive market intelligence, understand market landscapes, and decode emerging trends to make informed decisions.

Break even – Key Tips On Managing Break-Even-Inc42 Media
Track & Decode the Investment Landscape

Stay ahead with startup and funding trackers. Analyse investment strategies, profile successful investors, and keep track of upcoming funds, accelerators, and more.

Break even – Key Tips On Managing Break-Even-Inc42 Media
Break even – Key Tips On Managing Break-Even-Inc42 Media
You’re in Good company