An easy break-even analysis is what you need to determine the point at which you start recovering business cost, and start yielding revenue. This cost accounting technique calculates what is known as a margin of safety, an analysis that determines how many units of products your company needs to sell to recover the cost of money spent, realize profit and build a sustainable business model.
You need to start by classifying your company’s monthly fixed costs like rent, salaries, utilities and add them together. Once you have your fixed cost, classify all variable expenses that change monthly, depending on the production volume of your business. You can also calculate the average variable expenses over a 6-months period, to determine where you can reduce variable costs and get closer to breaking-even. The added fixed and variable cost will make up the total cost. Ensure that you also make provision for unplanned overhead costs and add it to the total.
After identifying both fixed and variable costs, calculate your unit contribution margin. This is the amount of money that each unit of a company’s product yields after paying off the variable costs. Simply subtract a unit of variable costs from its sales price. For example, if the sales price of one bag of pure water is N50 and each bag is accompanied by 3 variable costs, namely: fuel to power the machines (N10), packaging (N5) and labour (N10); the contribution margin for a single production of a pure water bag is: 50 (-) (10+5+10) or N25. Therefore, selling a bag of pure water to a customer brings the business N25 in revenue after recovering its variable costs.
To calculate your break-even point, divide all your fixed costs by the contribution margin of your product. Using the above example, let’s assume all your company’s fixed costs for a given month is N5,000. The company breaks even only after 100 bags (N5000/25) of pure water have been produced in a month.
A break-even analysis calculates both profit and losses at different stages of a start-up’s production and sales. It is usually advisable to conduct this analysis within the first 6-months of business operations, to help you accurately incorporate your break-even point in your pricing to ensure you are making profit per unit sold.