Express these objectives in dollars or units of product. A business should do a
break-even point analysis frequently. Then, it can be constantly aware of what has
to be achieved before the business begins to make a profit.
Certainly, before embarking on new programs or focusing on new markets,
consider all the expected costs, and complete a break-even point analysis.
Sometimes, what looks like an attractive business opportunity is not so great upon
closer examination.
Increased sales do not necessarily mean increased profits. This is because a
dramatic increase in sales, or the launch of a new program, may necessitate the
purchase of additional equipment or the funding of additional internal or external
resources.
The result could be that the 'bottom line' or net profit to the company will stay much
the same. In other words, the 'return on investment' (ROI) is not worth the
additional expense. Sometimes, this is only a short-term effect and, in the long run,
making the investment may be a good decision.
Every business case is different and only the business owners or managers can
make that decision. What often happens is the additional investment creates unused
capacity in the business; thus, the amount of business required to break-even or
reach profit goals is increased significantly.
The break-even analysis helps the business owner or manager to make intelligent
decisions when considering new programs or any additional investment in the
company.
How to use this material
New businessesSome of the figures you need to calculate the break-even point will have to be
estimates. It is often a good idea to use very conservative sales figures and overstate
the expenses somewhat.
Existing businessesSome of the figures you need to calculate the break-even point will have to be
estimates. It is often a good idea to use very conservative sales figures and overstate
the expenses somewhat.