Many experienced entrepreneurs use a break-even analysis as a primary screening tool for new business ventures.
They won't write a complete business plan unless their break-even forecast shows that their projected sales revenue far exceeds their costs of doing business.
To calculate your average gross profit percentage, divide your average gross profit figure by the average selling price.
Calculating Your Break-Even Point Once you've calculated the numbers above, it's easy to figure out your break-even point.
What a Break-Even Analysis Tells You A break-even analysis shows you the amount of revenue you'll need to bring in to cover your expenses, before you make even a dime of profit.
If you can attain and surpass your break-even point--that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses--then your business stands a good chance of making money.How can you tell if your business idea will be profitable? But this uncertainty shouldn't keep you from researching the financial soundness of your idea.Preparing what's known as a "break-even analysis," or "break-even forecast," as well as several other financial projections, can help you determine whether or not your business will succeed.The cost of selling those products could easily reach ,000 at wholesale cost, which only leaves ,000 in gross profits.Your small business reaches the break-even point when revenues from product sales equal all business expenses.Performing the analysis requires three basic pieces of information that are discussed below.Analysis on Fixed Costs Generally, the fixed costs in your small business are operational expenses such as payroll and building lease payments that do not change from month to month.Simply divide your estimated annual fixed costs by your gross profit percentage to determine the amount of sales revenue you'll need to bring in just to break even.If You Can't Break Even If your break-even point is higher than your expected revenues, you'll need to decide whether certain aspects of your plan can be changed to create an achievable break-even point.You'll need to make the following estimates and calculations: --Fixed costs.They include rent, insurance, utilities and other set expenses that don't vary much from month to month. This is the total dollars from sales activity that you bring into your business each month or year. Average gross profit is the money left from each sales dollar after paying the direct costs of a sale.