Break even analysis involves determining the number of sales your business must achieve to be profitable . Commercial businesses are run to make a profit. Therefore , it makes sense to check to see that your business is engaged in profitable activity. It is easier to sell under priced goods or services because they are cheaper than properly priced goods. Yet, if your business continues to do so particularly if you are unaware of the accruing losses , the impact on cash flow mind lead to business failure.
There are precursors to a valid break even analysis. You should have a well thought out , detailed and numerical business projection for the year ahead. Naturally, this would have been prepared using known product prices and business costs. The figures determined from this projection can now be utilised in the break even analysis.
At its most basic, with a single product/service business, a break even analysis consists of dividing the total projected costs , by the price of the item sold. This yields the number of items that must be sold at that price to cover the costs.
With your break even analysis done, you should know how to price your goods or services, and what level of sales you have to achieve by the year end. There are other aspects of break even analysis that will be beneficial to the small business in North London , the UK, or else where.
For most businesses, the process will clearly be more complicated than has been described in this short article, and here at North London Accountancy , We would be delighted to assist you with break even analysis for your business. To re cap, two of the benefits of Break even analysis are:
Determine correct pricing of goods and services
Determine required sales for a financial period at the determined product/services price.