Knowing your business’s break-even point is fundamental in determining whether or not your business venture is successful, failing or ultimately worth pursuing.
A business’s break-even point is the point at which the business’s total revenue equals the total costs and expenses of running the business.
Knowing your business’s break-even point is crucial when determining product prices, setting budgets and preparing business plans. Basically, it is the number that determines how much a business can spend and how much it needs to make. Even if a business turns over a lot of money, it could still be making quite a loss. Using the break-even point can help determine this.
Understanding where your break-even point is allows owners to work out the following:
- how profitable the current product line is
- how far sales can decline before losses start to incur
- how much needs to be sold before a profit is made
- how any price reductions will impact on profits
- how much of an increase in price or sales is needed to make up for fixed cost increases