You have a new idea for a business, a new product, or a service. Perhaps you are still in the early days of your business. You are full of excitement and anticipation with the possibilities this new endeavor will bring once it hits the market. You have done your research to understand the competition, held conversations with your ideal customers to confirm the need and fine-tune your offering, and checked all the other pre-launch boxes. You may have even run some numbers (that makes me so happy). As you start, you want to become profitable as soon as possible. One of the best ways of staying focused on the success of this new endeavor in the early days and months is to calculate the break-even point.
What is the Break-Even Point?
The break-even point is the point at which a business’s sales (from products and services) are able to cover all of its expenses and costs. Of course, you ultimately want to have sales exceed expenses in costs, but you must first break even. On average, it can take a business up to 18 months to break even. That means during that 18 months you aren’t profitable. Not yet.
Why the Break-Even Point?
The break-even point is important because it
- Provides a tangible goal
A break-even point is a single tangible goal or threshold that a business owner can focus on every single month. The closer you get to this target, the closer you get to success and profitability. This target can be used to determine your selling activities which will hopefully generate enough sales to lead to your ultimate goal.
- Answers Basic Questions Quickly
The break-even point gives you a relative idea of where your business is performance-wise compared to your goal. It can help you answer questions such as “When can I pay myself a reasonable salary?” and “When can I afford to hire someone?”
- Can Be Tied to Your Desired Salary Goal
Let’s be truthful. While you may have altruistic goals of helping people and serving the world, ultimately it comes down to will you be able to pay yourself what you want to pay yourself so you can live the lifestyle you want. Whether that be a modest or extravagant lifestyle, you need money to live the way you want. The break-even calculation can be modified to start with your desired salary goal (salary) and you can back into what sales activity is necessary to get you there.
One final note to keep in mind is that calculation of break-even is not as simple as listing out expenses and income. While it is possible to DIY this calculation, it is better to consult a professional to ensure you are doing it the correct way and not missing anything.
Need guidance? I’m here to help. As a business solutions expert, I have helped dozens of businesses untangle complex issues and clarify a path to greater profitability.
Email info@ltaylorassociates.com so we can discuss how I can help.
If you enjoyed this content and want more of the same check out my free guide Do This, Not That: 5 Things Keeping Your Business From Reaching Its Fullest Potential where I discuss common barriers to profitability that I observe among most small businesses.