When you have what you think is a good idea, the first step is to analyze whether your business will succeed. The first financial tool you should use is a break-even analysis.
A break-even analysis will calculate what your revenues must be for your business to produce a profit. The key to using this tool is to be realistic in your expected revenues and conservative high in your expected costs.
Breakeven point formula
The break-even analysis will force you to do the research that vreak allow you to know whether you should pursue your business idea further. Revenues above the break-even point result in profits whereas revenues below the break-even point result in losses. You can do a break-even analysis whether you are selling a product or a service.
If you have a rough idea of what your expected revenues will annalysis, you can tell after doing a break even analysis whether you can expect a profitable business. If not, you either have to make some changes or give up your business idea.
Three assumptions of the break-even analysis
Break even analysis sample in business plan is crucial to understand some basic concepts before doing a break-even analysis. Plugging our evdn except the number of widgets we expect to sell into the formula, we get the following:. If we sell more than 1, units per month we make a profit. If we sell fewer than 1, widgets per month, we lose money.
If not, you must have a plan to increase sales or lower costs.
Many such issues can be addressed once you have determined your break-even point and your expected profit given your expected sales. Consider the following:.
Benefits of break-even analysis
If you can do none of those things, maybe your idea is not economically feasible. Break-even analysis is a powerful tool you can use to determine whether your business idea will be profitable.
Consider your break-even analysis to be only one tool in your arsenal. Even if this analysis shows that you can make a profit given your expected sales and costs, there are other tools you will use in your business plan to give you a fuller picture of your financial forecasts.
Breakeven point definition
Among them are:. These tools are covered in the business plan section. PEST Analysis. How to Write a Business Plan.]