How to Do a Breakeven Analysis and Improve Profitability
08 May 2015
Managing profit and loss is all about managing the relationship between costs, volume and pricing. Breakeven is a tool that can help business owners and managers gauge the results of future changes to costs (expenses) or pricing.
A breakeven analysis focuses on two types of costs – fixed costs and variable costs – and how changes in either affect profits. By using the break-even tool, we can map changes to costs and/or pricing to the corresponding changes that are required in sales volume if a given level of profit is to be maintained.
Why is the simple calculation of breakeven so important?
Used correctly it can provide information that:
- Leads to better pricing strategies
- Demonstrates the full impact of discounting and what it really costs you
- Improves variance analysis and your ability to manage risk.
Sounds like the silver bullet that all business owners need, so why aren’t more businesses taking the time to use it correctly?
In our experience up to 75% of business owners do not know their breakeven point in terms of sales dollars or volume. Those that claim to know their breakeven point, often have an incorrect estimate and are not using it to maximum
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