EP79 Four mighty reasons to calculate a break-even point

Financial control is essential to running any business, particularly in a competitive market like ecommerce. Applying the break-even analysis formula to your business can be a valuable way to stay in control of your finances. The advantages of calculating your break-even point include:

• It tells you when you make a profit. Knowing how many units you need to sell to make a profit can help you set appropriate revenue targets. You can also calculate the break-even point in terms of money, which is useful if you have many products

• Helps you set a price. There are a few ways to set your price. Your break-even point can influence your pricing strategy; businesses in competitive markets price their products to attract and compete with competitors. However, understanding how your pricing strategy affects your gross margin is crucial to maintaining a healthy financial bottom line.

• Motivates you to analyse your costs. Calculating your break-even point is also great for analysing your business costs, including your total fixed costs. To avoid your company operating at a loss, you need to keep your business costs under control. Identify fluctuations in your total costs to pick up on expenses you may have missed. It’s also important to use regular break-even analysis to identify trends in your business costs. This will help you spot if your variable costs per unit are creeping up.

• Gives a basis to analyse product performance. Calculating and monitoring your break-even point can help analyse a product’s performance and contribution margin. It’s also great for determining the risk associated with stocking a new product. Product lines that are cost-intensive or not selling well can take longer to become profitable. Similarly, a product or service with a contribution margin that is too low means it takes longer for your business to reach profitability.

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