The basics of business are: 1) Customers want a product; 2) You sell your product to customers; 3) You profit. It may seem simple, but there is much more that goes into running a business successfully than those three components. In order for business owners to have a clear idea of exactly when and how they will "break even" and start making a profit, it is imperative that they know how to calculate a break-even point from a balance sheet. This article will outline the basics of using a monthly balance sheet to determine the break-even point for the business.
Begin by determining the fixed amount it takes to keep your business open (i.e., utilities, expenses, rent, etc.) each month. Add up all of your monthly expenses (not including the supply or production costs of your products).
Determine the profitability of each of your products. Profitability is equal to the retail price of the item minus the cost of production.
Plug your figures into this formula: $Cost of running business / ($Total retail price for all products - $Total cost of production for all products) = Number of items (by type) that need to be sold in order to begin making a profit.
Know that you have now calculated the number of sales for each product you will need to make in order to begin making a profit for the month. Use this information to determine which products are more profitable and will get you closer to your goal of breaking even in any given month. The faster you get to a break-even point, the more profitable your business can be.
Tip
Many financial planners and business consultants can help you determine the best way to reach your break-even point in any given month. It is often worth the money to hire one of these consultants to help guide you in this endeavor.
Warning
Don't always rely on making a large profit each month as a "thermometer" of how your business is doing. There are many industries in which there is an "ebb and flow" of profitability each month, and this is important to remember when determining the profitability of your business.
