![]() To perform a valid break-even analysis, you must base your forecast on the volume of business you really expect - not on how much you need to make a good profit.Īverage gross profit is the money left from each sales dollar after paying the direct costs of a sale. This is the total dollars from sales activity that you bring into your business each month or year. It's also a good idea to throw a little extra, say 10%, into your break-even analysis to cover miscellaneous expenses that you can't predict. They include rent, insurance, utilities, and other set expenses. You'll need to make the following estimates and calculations:įixed costs (sometimes called "overhead") don't vary much from month to month. Business plan books and software can teach you how to make reasonable revenue and cost estimates. ![]() You should do some serious research - including an analysis of your market - to determine your projected sales volume and your anticipated expenses. To perform a break-even analysis, you'll have to make educated guesses about your expenses and revenues. The breakeven point is reached when revenue equals all business costs. The cost of selling $5,000 in retail goods could easily be $3,000 at the wholesale price, so the $5,000 in sales revenue only provides $2,000 in gross profit. For the startup business, it is extremely important to know your startup costs, which provide you with the information you need to generate enough sales revenue to pay the ongoing expenses related to running your business.Ī startup business owner must understand that $5,000 of product sales will not cover $5,000 in monthly overhead expenses. Breakeven analysis is a tool used to determine when a business will be able to cover all its expenses and begin to make a profit.
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