Break Even Analysis for a profitable business operations

As we are approaching dawn of 2021, start of a new decade it almost feels like we all are beginning afresh in the new year due to the disruption COVID has created in 2020. I am sure there are a lot of lessons learnt and will carry all that into the new decade.

However, one thing that is very simple that all business owners need to consider is looking closely at their operations and identifying the important factors that I believe would provide a good insight. It is break even analysis. A lot of people think break even analysis is only applicable to manufacturing and product based businesses. But, I believe it is as applicable to any business when you assume that business is one unit of production. Let me explain. 🙂

Similar to a product, every business will have fixed costs, variable costs, target profit for a specific period and average sales revenue. Although one may think that it is difficult to ascertain certain metrics for businesses. However, I believe that is what makes this such an important exercise for businesses to undertake.

As can be seen in the chart, profit takes only small part in the chart. Various costs takes most of the space because that is what makes up of any business. And by analysing these costs provides business owners important levers that can be managed efficiently to maximise profits in your business.

This also allows the business owner to set targets for their business for a new year and then break it down to different periods and create milestones to track the progress.

This also allows business owners to understand ROI of each of their investment (or expenditure). Of course there will be controllable costs and uncontrollable costs in every business. It is management of controllable costs what makes the difference between a profitable business and unprofitable business.

Get your accountants or bookkeepers to help you out with this or feel free to reach out to me. Happy to chat. 🙂