This is the second in a series of posts on how to take simple steps in
planning, without holding your business progress up for the complete formal
business plan. Get yourself and your business going on planning and you’ll see
the benefits and keep going with planning. The idea of simple steps also
recognizes that there is no particular order; this is the second in a series,
and any of them could be your first step. People are different. Do what feels
like it’s going to work for you, in the order that feels most appropriate.
Click here for the first in the series, on
The break-even analysis is relatively simple to do and an easy way to start with
planning. Use it to determine the lowest sales level that will cover your costs.
It includes both fixed costs, such as rent, utilities, and payroll; and variable
costs, meaning costs of buying or making the products you sell, or of delivering
Here’s how to do the break-even, step by step:
Set your thinking to imagine an average or standard month. That can be hard,
it can take imagination, but do it.
Add up your fixed costs, meaning basically rent and payroll and running
costs that you pay every month regardless of sales. These are the costs
you’d pay even if you didn’t have any sales. Make a simple list. Here’s an
Add up the costs for each unit that you sell, of whatever it is that you
sell. These are costs of sales, direct costs, also called cost of goods
sold, or COGS, all of which are essentially the same thing. Unlike the fixed
costs, these are costs that you incur only if you make a sale. If you don’t
sell, you don’t have them
You need to use your imagination, at this point, and not get lost in the
problem of averaging. This analysis doesn’t work well if you can’t do it
over your whole business. If you run a hardware store, don’t panic over how
many different items you sell and how could you possibly know. Here’s an
example, for a computer store, of its average cost per computer:
The key is to take an overall average. That’s easy for some businesses, and
virtually impossible for others, unless you take a deep breath and remind
yourself it’s an analysis, not a tax report; it doesn’t have to be exactly
correct, just accurate enough to make the analysis worthwhile. When in
doubt, just get the Profit and Loss report from your most recent accounting,
and use the same numbers that were used their to calculate the gross margin.
Sales less cost of sales is gross margin. So if you don’t have a better way
to average, just use $1 as the revenue per unit, and as many pennies as your
percentage cost of sales as the per-unit cost.
With those numbers, you can calculate a break-even point. It takes sales of
10 computers in a month to cover your costs. You can see that in the
break-even illustration below:
Break-even is how much you have to sell in a month to cover the costs. So in
this example, selling 10 computers gives your hypothetical business $9,950,
which covers $5,334.90 that it took to buy those computers (that’s 10 times
$533.49) and $4,540 in fixed costs. Total costs are $9,788. That’s often
used to draw a line graph, with the sales line crossing the zero at the
break-even point, as in the following:
You can see in that chart how profits (the vertical) start when units (the
horizontal) get past 10, in this example.