Video:How to Do a Break Even Analysis

Transcript:How to Do a Break Even Analysis

Hi this is Jaclyn Mullen with JaclynMullenMedia.com and today you are watching About.com. We're going to be discussing how to do a break even analysis. Profit, it is every business owner’s goal. After all you go into business to make money, right? But how do you determine at which point your company, your product or your service will in fact be profitable? By conducting a break even analysis.

Determine Business Costs

Now what exactly is breaking even? Breaking even is when your costs and your revenue are equivalent. Profit is when your revenue exceeds your costs. So how do we get you on a path to profitability? I'm glad you asked because I've got some answers for you. First, we need to determine what your costs are. And there's two different classifications of costs. There are your fixed costs, those things that don't change on a monthly basis. Examples are rent and insurance. And there are variable costs, things that do in fact change on a monthly basis, such as: contract labor, gas expenditures, marketing design, business cards, vendor services or even client gifts.

Determine the Pricing for Your Business Service

Now that we've identified what types of costs are commonly associated with your business, we need to come up with a price. And I know that makes you smile, right? So how do you in fact determine pricing for your product or service? There are two ways to approaching this. The first is cost-based pricing - take the cost it actually took to manufacture or create the item and adjust accordingly from there.

And the second is price-based costing - what is the market willing to pay for that product or service? An example of this would be a haircut or consulting rate, looking at what the competitors are charging, and then adjusting your prices accordingly.

Use the Break Even Formula

Now we’re trying to calculate your break even point, and we do that with a formula. We divide fixed costs from the unit selling price, minus your variable costs. This gives you the amount of units you need to sell in order to break even. Naturally, if you surpass sales of those units, you're making profit, right? Of course.

So you can see why this information is really important and we've gone ahead and done this formula manually, but I will let you know that there are online calculators that will also create this formula for you as well. As a matter of fact Inc.com has a great tool. You can also check the many references that will be found on the Entrepreneur section of the about.com website. All in all, now that you're no longer breaking even and on your way to profitability, I hope you're really happy.

Thank you so much for tuning in to About.com today. This is Jaclyn Mullen signing off.