In business, your ultimate objective is to make money.
So, when you launch a new product or purchase a new piece of equipment, how do you know whether a potential investment will at least cover the costs associated with it?
You could simply make a wish and hope it all works out – or you can evaluate the project more formally to see if it makes financial sense. One way of doing this is to complete a Break-Even Analysis.
This determines the break-even point – the level of output at which the revenues generated by a project equal costs.
At the break-even point, you don't make or lose money. Once you pass break-even, you make money; below break-even, you lose it.
Using a Break-Even Analysis, you can answer questions like:
- What are the projected profits and losses at any given output level?
- At what minimum sales level do you avoid making a loss?
- Do your sales projections for a new product exceed break-even?
- If you drop a product, will your break-even improve?
- How will raising or lowering prices affect your profitability?
- If costs increase, what is the effect on your break-even position?
- How does investing in facility improvements affect your break-even position.
Knowing your break even per annum, per month, per week, per week and even per day is essential for business success.