Why getting to break-even is so crucial?

Here at GeekAnalyst.com we help organization improve their business by providing advice and tools for financial analysis.

A company can reach performance by reaching “break-even”. As the word tells us, at this point the company “breaks” it’s current results to “even”, where revenues are equal to costs.

So, why is is getting to break-even so crucial? We will point it out in the following examples.

Let’s presume that you are a start-up company that organizes events, let’s say conferences & seminars.

Your next conference will have fixed costs (e.g. renting the venue, speakers’ fee, hotel, plane tickets and more, team incentives, advertising) and variable unit costs (e.g. conference materials, meals, coffee breaks and so on). Your renting venue has around 150 seats, so you are interested in setting the price to see the number of tickets needed to be sold to reach break-even. This calculation will let us estimate if the number of tickets to reach break-even are realistic and if it’s too close to maximum capacity to be sold (reducing the potential profit).

break even calculation by @geekanalyst

We supposed that our variable cost are 210$, with fixed costs of 7,000$. The price was set at 410$/ticket (we can have multiple pricing, but in this example we consider an average one). By applying a simple formula that is

Break even point (no. of unit) = Fix expenses / (Unit price-Variable unit cost) 

the break-even point was calculated as 35. So, the number of tickets needed to be sold to reach break-even is 35 tickets. Based on this, we can adjust the  tickets price  based on our estimations. As, we considered that we can sell around 110 tickets, thus, there’s plenty of space for profit ($$$). Also, our venue has 150 seats, so we can reach break-even through 23.33% of the available seats.

This simple, but efficient calculation can trigger some actions like:

  • increase or reduce price
  • have cost-cuts on fixed expenses that we cannot afford
  • increase advertising cost in order to reach the break-even point

Of course, there could be others.

The break-even graph, based on our example is: BREAK-EVEN

In brief, here is our advice when it comes to break-even:

1. Don’t underestimate the fixed and variable costs .This frequent mistake can lead you to a lower value of sales at break-even.
2. Pay attention to production/sales capacity (or in our example the maximum number of seats). Based on the production capacity you can set a price that will lead to low values of sales needed for break-even to leave space for profit.
3. Adjust the pricing to meet the target sales. Adjusting the price on the market is the foundation, but adjusting based on break-even point is the actual construction.

Here at GeekAnalyst.com we’re working on financial analysis solutions to help you boost profits. Subscribe to our newsletter to find out more.

Also, register for our “Financial Analysis for startups” Webinar which will take place on October 17, 2013. Details and Registration here.

This article is also available as a recording:

 

Be Sociable, Share!