Using Break-even Analysis to Improve Business Growth
It’s important not to lose sight of revenue and business spending through cash reserve management. In my experience, I have found many business owners don’t have extensive knowledge of their revenues and break-even points. To achieve business goals, you have to start with a successful break-even analysis.
The Importance of Break-even Analysis
I’m amazed by how many business owners aren’t familiar with the numbers surrounding their cash flows, revenue, and profits. These entrepreneurs run companies with revenues of 50 million dollars. Lack of with in-depth knowledge about a company’s numbers and break-even analysis negatively affects business growth.
I find even the most successful entrepreneurs telling themselves: “As long as I have money to pay for things, everything is okay.” This mindset is acceptable in the start-up phase but is toxic further down the road and hinders business growth, potential and even lead to ruin.
Understanding the break-even analysis of your company can help avoid these mistakes.
What is a break-even analysis?
Break-even analysis a calculation and examination that explores how much a company needs to sell in order to cover the all the costs associated with doing business. A break-even analysis calculates the break-even point by examining the link between sales, profits and cash flows. The uses of break-even point in this analysis provide a dynamic view of the relationships between expenses and revenues.
Why is a break-even analysis useful?
Break-even analysis examines the levels of fixed costs in relation to the profit earned by each unit produced and sold. This metric allows management to set prices and understand the economic impact of various pricing scenarios.
Importance of a break-even analysis in business decisions
Applying a break-even analysis to business decisions to improve growth. The Harvard Business Review has found a link between setting the right price for a product or service and boost in profits and sales. HBR even provides an interactive break-even analysis that allows users to input actual units sold along with revenue, variable and fixed costs per units sold.
The importance of break-even analyses is highlighted in a conversation I had with the CEO of Burning Fast Inc. (Note: The names and figures have been changed in order to protect identity and confidentiality).
The company was in the middle of developing new products inside their company, thus investing into research, development, hiring and training new employees.
Rony: How much will your monthly expenses increase with the new products?
CEO: Mmmmm, close to $15,000.
Rony: How much do you need to sell or bring into the company to pay for those expenses?
CEO: It’s obvious, $15,000 or more.
Rony: Really? Obvious? That will lead you down the path that many have already traveled, to Broke Town.
CEO: Why is that?
Rony: Before I answer, what’s your current gross margin?
Rony: OK, so if you are increasing expenses by $15,000, and your gross margin is 10% on your product, it would be important to know that you have to bring in $150,000 in new sales every month to pay for that increase.
CEO: Ohhh, now I see.
By implementing a break-even analysis, CEOs make better decisions, provide clarity and help set goals of success. This analysis should be done with any decision that increases expenditure.
Improve Business Growth with Assured Strategy
At Assured Strategies, our business strategy coaches know the important link between break-even analyses and business growth. Learn more through a free coaching session.