The essential information on your fixed costs paired with the calculation of your variable costs will enable you to price your products and services with the accuracy and precision required to maximize your profits. The Break Even Point, or as others will define it, the no-profit, no-loss point or zero profit point, is the point where the total revenue equals to the total costs, both fixed and variable. The Break Even Point is used to calculate the Target Operating Income; total revenue equals total cost.
The BusinessDictionary.com technically defines variable costs as the costs that vary directly with the level of output or sales revenue of a company. Owners must follow these variable costs closely as each and every high variable cost will significantly affect pricing and profits. Some very important business decisions are made considering these costs. It is important to have a full understanding of your fixed costs; set crystal clear numbers for rent and depreciation, as well as sales, production, delivery, and servicing. Know your fixed costs by product. If needed, work with your accountant. If you have not completed a fixed costs analysis, it is highly recommended to complete that with urgency.
In this global economy of sharing data quickly and extensively, businesses are now focusing on using fewer resources to obtain the same results. It is a business imperative in today’s competitive environment. There is a surprisingly little understanding of how fixed costs can be judiciously and effectively turned into variable costs and for that matter, what the effects are on businesses, consumers, as well as the overall economy. Not to mention the huge impact on your own personal economy. The never before available technologies that produced the data sharing economy are turning fixed costs into variable costs across businesses of all sizes, catapulting the use of outsourcing, partnering, and business infrastructure service companies into the forefront of business solutions and profits. As a result, a reduced need for capital provides businesses the ability to scale down their investments which in return easily reduces some business risks. Small businesses are reducing business infrastructure but at the same time enjoy big businesses’ services. It is truly the best of both worlds. Today’s ways of contacting business partners and suppliers are turning their human capital fixed costs into variable costs, as well in areas where it makes sense.
Costs and Revenues Define Your Break Even Point for Profits
On the graph, fixed costs are represented by a horizontal line. Total costs are the combination of these fixed costs plus variable costs which are shown as rising at an angle up from the fixed costs line. Variable costs can include labor, materials, energy, and delivery costs. The Revenue line starts at zero and moves upward at an angle. The Break Even Point is where the Sales Revenue line intersects the Total Cost line.
The Break Even Point is the point where the sales price per unit multiplied by the number of units is equal to the variable expense per unit multiplied by the number of units plus the fixed costs. The loss area is the difference between the total cost line and the revenue line before the Break Even Point. This area reduces as the number of units sold increases. The profit area is above the Break Even Point and increases as the number of units sold increases.
It’s critical for any business owner to know exactly what the monthly expenses are, both fixed and variable so that you can determine the amount of sales required to equal those committed expenses. Having a crystal clear Break Even Point in mind is critical to enable you to expand your business and increase profits with confidence. The more you know, the more flexibility you will have in pricing your products. The more you know, the more flexibility you will have in managing your business.
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P.S. For more information please click on the link to get my Special Report: “3 Profit Pitfalls and How to Avoid Them.”
P.S.S. I’d love to hear your thoughts on this process and support you in an overall evaluation of your business.
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- Costs and Revenues Define Your Break Even Point for Profits