What is a break even analysis?

1402638473_Money_256Learning the core basics of business is a broad subject to dive into.

There are somethings that you should know if you have an idea, you know someone in business, you are about to retire, and as always how aspects of business integrate into your personal life.
With that in mind, lets take a look at the term Break Even Analysis or for short BEA (bee-ahh)

Key points that we will review:

  1. What is Break Even Analysis?
  2. Why do we need a Break Even Analysis?
  3. How can we use a break even analysis?
  4. What are the benefits?
  5. How can we use breakeven analysis in our personal life?

What is Breakeven Analysis?

1402638218_calculator_512Breakeven Analysis is a term used to determine how you know when to expect a profit.   It may seem difficult but in fact this is one of those things that you may realize you are doing already.  The formula for finding out your breakeven point is below

breakeven= fixed cost/(unit selling price-variable cost)   

For example, you sell phones (get it cell phones, lol) it cost you $50 to make a phone and you have fixed cost which are expenses that stay the same in cost every month or year.  Your fixed cost is $1000. Your breakeven point for selling the phones would be

Phones sell for $100:  $1000/(100-50)= 20

Which means you would sell 20 phones at $100 to reach your breakeven point, any phones sold after your breakeven number which is 20 will be a profit.  You sell 21 you have reached a profit anything after that is money in the bank.

Why do we need a break even analysis?

Break even analysis is needed to determine your profit growth and margins.  If you do not have a clue as to when you are actually profitable you will just spend money outside of your normal expenses or fixed/variable cost and eventually wonder why you have not made any money.  This will help you understand the small things that help your business grow.

How do I use BEA?1402638406_Analytics_256

Video- Watch this video to have a visual and audio perspective

All you need to do a break even analysis is the formula below.

The formula:  breakeven point or magic number= fixed cost/(unit selling price-variable cost)

Fixed cost are expenses that do not vary with sales volume, such as rent and salaries.    Fixed cost have to be paid regardless if you make a lot of sales or no sales at all.   Unit selling price is how much you are selling your quality product or reliable service for.   Variable cost changes directly with sales volume, purchasing inventory, shipping, and manufacturing a product   Use BEA as a way to know your start-up or overhead cost and also to know your profit.

What are the benefits of knowing BEA?

The benefits of knowing your break even  point are pretty easy to consider.  It helps you know how much money you are spending and what it takes to make that money back and profit thereafter.  Now of course once you know your breakeven, it i like a business plan, it will change with time, every month, every quarter, every 6 months, or every year.  It can also be used to project future growth based on past data.

How does BEA effect my personal life?

1402638292_interact_256It is also good to apply this to your personal income and expenses.   This way if you are looking to change your lifestyle, leave your job, retire, or start a business you can look at your personal income and expenses to determine how much money is needed to supplement your income and take care of your expenses.  If you work from home this may turn into business expenses and you apply the formula as needed.

 

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