Things You Need to Know about Break-Even Analysis
When you have a business to run, performing a break-even analysis is quite important. A break-even analysis can be used to determine whether your revenue will be able to cover all of your expenses within a specific time period or not. Commonly, professionals use the analysis with one-month time period for the analysis process.
Here is how the analysis is going to work. If the revenue is passing more than the break-even point, then your company will be able to gain profits. However, if the revenue cannot pass or even does not reach the break-even point, then your company may suffer some losses. To perform the analysis, you might need to create a break-even analysis excel template. To create the template, you can either create by yourself or download free break-even templates. Either way, you need to do the analysis carefully and make accurate calculations in order to avoid any losses
Terminologies Used in the Break-Even Analysis
Before you perform the analysis, you need to make the analysis template. Before you make the template, you need to know some common terminologies which are used in the break-even analysis. There are at least four terminologies which are used in the break-even .
- Fixed Costs
This first terminology refers to costs which remain constant throughout the payback period such as insurance, advertising, rent, taxes, supplies, and many more.
- Payback Period
The second terminology refers to how long it would take your investment to reach the break-even point which depends on the change rate in your market.
- Sales Price
The third terminology refers to the price of the goods or services you are selling.
- Variable Costs
The last terminology refers to how many products you’ve made and how many you’ve sold such as direct labor, production, materials, and other costs.
Tips on Completing the Break-Even Analysis Template
If you have already finished in making the template for the break-even analysis template, you need to complete the analysis correctly. These following tips will help you to complete the analysis:
- You need to input all of the estimated fixed and variable costs.
- You need to keep in mind that fixed costs have to remain constant. Meaning, they stay the same regardless of the sales volume. Meanwhile, variable costs will change when the sales volume changes too.
- Lastly, you need to always use whole numbers instead of decimal numbers when entering variable costs.