Break-even Sales – How it matters to your business

The concept of break-even sales and how quickly you can achieve it, is a crucial milestone for startups and emerging companies. While handling the myriad problems of running a business, like developing products, managing operations, securing funding, and optimizing cashflows, you often cannot give enough attention to this aspect of Break-even Sales.

But Break-even sales is the first step towards profitability, a significant marker that your business idea is marketable, and a confidence booster for you and your team members.

What is Break-Even Sales?

Break-even sales is the level at which the money you make (revenue) is equal to the money you spend(expense), resulting in neither profit nor loss.

During the initial years of setting up your business, there is likely to be a lot of capital expenditure which makes it difficult to break even. As the business grows and matures, the expenses settle down and the income starts flowing. Most businesses break even in the first 1-2 years. The longer you take to achieve break-even sales, the more you will bleed and need to depend on your personal funds, or external funding.

How to calculate Break-even sales?

Though the formula is very easy, the actual calculation of Break-even sales would include many nuances requiring expert opinion. There are decisions to be taken on what costs to include in calculating Break-even sales – rent, salaries, software costs, sales commissions, raw materials, fixed costs, variable costs, and so on.

A CFO with expertise in working with businesses in your industry will be able to provide you with guidelines on industry standards and best practices in calculating break-even sales. By determining the costs involved in offering the products or services, you can make crucial decisions on the pricing and positioning of your offerings.

Types of Break-Even Analysis

You can calculate Break-even analysis from different perspectives like the units you need to sell, the revenue you need to generate, or unit contributions towards profitability.

Unit Break-Even Analysis

This is the number of units you need to sell in order to cover all the fixed and variable costs. Especially important for product companies, this can help in setting targets and sales volumes that need to be achieved to break even.

Revenue Break-Even Analysis

This includes the revenue you need to earn to cover the fixed and variable costs incurred in offering your products or services. This is the most common one used by businesses since it compares similar units of expenses and income.

Contribution Margin Break-Even Analysis

This measures the contribution of each product or service unit towards covering the fixed and variable costs. Connected to Unit economics, it can help you decide on pricing and optimizing product costs.

Why Break-Even Sales Matter?

Now that you know what Break-even sales is and how it’s calculated, you would understand that it is important in measuring your organization’s financial performance. Here are a few reasons why Break-even sales matter:

Financial Health

Break-even sales analysis can provide you with valuable markers about the financial health of your business. By comparing sales numbers to the break-even point, you can understand if your business is profitable and help you make adjustments to take the business further towards profitability.

Comparing break-even sales of your business to that of your competitors, or other businesses in your industry can provide benchmarks on your financial health.

Decision Making

Break-even sales is a significant milestone for startups and emerging businesses, the point where the business moves from a loss-making venture to potential profitability. This can increase your confidence and trust in the business manifold, enabling you to make better, bolder decisions. It can help you set more realistic business goals and milestones, armed with information on the financial performance.

Risk Management

When you know exactly how many units of products or services you need to sell to break even, you are in control of the organization’s finances and able to take proactive measures to achieve break-even sales. In uncertain market or economic conditions, this information can help tide over risks and volatility.

Tools and Resources for Break-Even Analysis

There are several tools available to calculate break-even sales. This easy BEP (break-even point) calculator from Zoho and the Break-even analysis tool from Nextbizthing can give you a ballpark estimate of the number of units to sell to break-even in your business.

Remember that these can easily applied for Products, but is difficult for services where the Pricing would change depending on the scope of projects, and there is no easy price per unit calculation possible.

How to Achieve Break-Even Sales Quicker

As a founder, everybody is expecting you to wave the magic wand and make the business profitable. Here are a few things you can do in the initial stages of your business to break even quicker and more efficiently.

Cost management

All businesses will need to keep strict control over costs during the bootstrapping phase. Very few businesses start with unlimited capital and risk appetite. Cost management involves a close scrutiny of all expenses to reduce waste and improve efficiency like negotiating with vendors, optimizing operations, leveraging technology, and automating processes.

Sales Efficiency

Identifying the target market, positioning the product or service just right, devising the right marketing strategies and sales tactics, and retaining existing customers while trying to acquire new ones are all important for new businesses. As a founder, you have to focus on the entire sales funnel from generating high-quality leads, converting them as quickly as possible, and maintaining customer satisfaction as well as the lifetime value of customers through cross-selling and upselling.

Break-even analysis can help you focus on the right areas of your business, and the right product-market fit to channel your energies in the right direction.

Pricing

Pricing your product or service just right is an art and a science in itself. Conducting an in-depth market research on what your target market would be willing to pay, their perception of the value of your product, and your competitors’ pricing strategies are all factors to consider before you finalize your pricing strategy.

Volume discounts, launch offers, and bundled pricing strategies can all help you drive sales and reach the break-even point quicker.

Alternative Revenue Streams

Relying only on your capital to run the business is not easy when your revenue is not flowing in as it should. During the initial years of business, it makes perfect sense to explore alternate sources of income, loans, and funding options that can help you break even quicker.

Until you finalize your service offerings, products, target markets, positioning, and pricing, you have to try out various options, side hustles, and gimmicks to get your business off the ground.

Monitor and Adapt

Even after you achieve break-even sales, you cannot take your foot off the pedal since your business should then grow profitable and sustainable. Founders have to keep an eye on the financial health and key performance indicators, and track the performance against goals to adjust strategies every quarter. The best thing an organization can do is to be agile in offerings, strategies, and goals – pivoting as required to stay relevant in a changing economy.

Break-even Sales as a Guiding Force

Break-even sales is the first step towards making your business profitable, and the quicker you achieve it, the higher the confidence it gives to the management, employees, and stakeholders. If you would like help in conducting an in-depth break-even analysis for your business, reach out to Finavi CFO today.

We have over 14 years of experience working with small and emerging businesses in their journey towards profitability and sustained growth. Our experts can partner with you to implement cost control, pricing strategies, and exploring alternate revenue sources to help your business break even quickly and efficiently.