Break even utilization

If you can accurately forecast your costs and sales, conducting a break even analysis is a matter of simple math. A company has broken even when its total sales or revenues equal its total expenses. At the break even point, no profit has been made, nor have any losses been incurred. This calculation is critical for any business owner, because the break even point is the lower limit of profit when determining margins.

Defining Costs

There are several types of costs to consider when conducting a break even analysis, so here’s a refresher on the most relevant.

* Fixed costs: These are costs that are the same regardless of how many items you sell. All start-up costs, such as rent, insurance and computers, are considered fixed costs since you have to make these outlays before you sell your first item.
* Variable costs: These are recurring costs that you absorb with each unit you sell. For example, if you were operating a greeting card store where you had to buy greeting cards from a stationary company for $1 each, then that dollar represents a variable cost. As your business and sales grow, you can begin appropriating labor and other items as variable costs if it makes sense for your industry.