For your business to reach its break-even point, it needs to sell a certain number of volumes. As a little illustration, General Motors, in 2011 had their break-even point in 2011, when they sold two million vehicles.
Even though General Motors is a large business corporation, small businesses need to be able to understand the principle of break-even points and also how to reach it. To help you out, here’s a short guide on how to reach yours’;
How to Manage Your Small Business Up to Break-Even Point
1. Know the sales volume your business has to sell so as to cover the expenses. It is good to know how much your business needs to sell to remain afloat. It is a fundamental key to growing your business to break-even point.
2. Using the sales volume analysis above, you should then draw out a plan or scheme which will guide you (as the entrepreneur) and your employees. This will help you know the minimum output and performance required by your employees to keep the business running.
3.You can determine if your company is making a profit or loss in the break-even calculations by doing a little arithmetic. Make a list of all the expenses your company makes for a particular period. Most times, small businesses calculate for a year, or for a month. Whatever suits your business style is appropriate.
4. After the calculation is done, the first and best thing to do with this calculation is to derive your yearly break-even point. You can then break this down to show the monthly break-even points for your small business.
5. It might be very important to note this, though: know which of your expenses are variable, and know which ones are fixed. A fixed expense is one that does not change with then volume of sales your business makes. An example of fixed expense is the rent for your company’s land. You must always pay the rent, regardless of whether you made very high sales or not
6. Variable Expenses, on the other hand, change in accordance with your sale volume. If, for instance, you are a magazine company, your cost of papers would increase or decrease with an increase or decrease in the volume of sales of the magazines, Most times, they are calculated as a percentage of your total sales for the month or year.
7. This is the significance of knowing the difference between fixed or variable cost in your small business. This allows you
know how items pay for themselves in your production chain. When you make a sale, your earnings split in two ways: some part goes as payment for the item, and some part goes as payment for the fixed costs. Technically, this is referred to as your contribution margin (calculated as 1 minus the percentage of your variable expenses).
8. Once you get to your break-even point, your business has the potential to thrive forever! That’s the good news! This is the point at which your business can take care of itself, and you have a sustainable income. This is a piece of work, and you will get to know why in the next point.
9. A business that has gone beyond the break-even point must now be maintained. This is a very important step. You, as the entrepreneur must be able to decide if you like the idea of running that business for the rest of your life.
10. When you have gotten past the break-even point, the next thing is to convert the earnings from a nice income to a respectable income. It is at this point you can now safely collect all of the money you invested initially in the business.
Getting your small business to the break-even point should not only be seen as important but as an achievement. So, the next time you’re setting goals for your business, ensure you include this as a priority.
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