Break-even and Profit/Loss Tools can help your Planning

“I really need help with financial planning for my business”.  This is a very common plea from CEOs of both start-up and existing businesses.  So, in today’s column I will share three tools that SCORE mentors use with clients to assist them in getting a good handle on this aspect of the business whether it be for a business plan or just plain managing the business.

What is a break-even analysis?  The break-even point is the point when your business’s total revenues equal its total expenses.  That is, your business is “breaking even”—not making a profit but not losing money, either.

Therefore, after the break-even point, any additional sales will generate profits.

To create a break-even analysis, gather information about your business’s fixed and variable costs, as well as your 12-month sales forecast.  I have also found that it is helpful to do a profit and loss projection.   I use an Excel format for these and will send you a template for each of these tools if you give me an email request.   You can request them by sending me an email at: dean.swanson@scorevolunteer.com

Forecasting sales of your product or service is the starting point for the financial projections. The sales forecast is the key to the whole financial plan, so it is important to use realistic estimates. Divide your projected monthly sales into "Categories", which are natural divisions that make sense for your type of business. Typical categories might be: product lines, departments, branch locations, customer groups, geographical territories, or contracts.  The template that I will send you shows this strategy.

When Should You Use a Break-Even Analysis?  A break-even analysis is a critical part of the financial projections in the business plan for a new business. Financing sources will want to see when you expect to break even so they know when your business will become profitable.

financial toolsBut even if you’re not seeking outside financing, you should know when your business is going to break even. This will help you plan the amount of startup capital you’ll need and determine how long that capital will need to last.

In general, you should aim to break even in six to 18 months after launching your business. If your break-even analysis shows that it will take longer, you need to revisit your costs and pricing strategy so you can increase your margins and break even in a reasonable amount of time.

Existing businesses can benefit from a break-even analysis, too.  In this situation, a break-even analysis can help you calculate how different scenarios might play out financially. For instance, if you add another employee to the payroll, how many extra sales dollars will be needed to recoup that additional expense? If you borrow money, how much will be needed to cover the monthly principal and interest payments?

A break-even analysis can also be used as a motivational tool. For instance, you can calculate a monthly, weekly or even daily break-even analysis to give your sales team a goal to aim for.

Do you need help completing your break-even analysis?  Connect with a SCORE mentor online or in your community today.

About the Author(s)

Dean Swanson

Dean is a Certified SCORE Mentor and former SCORE Chapter Chair, District Director, and Regional Vice President for the North West Region, and has developed and managed many businesses. The Rochester Post Bulletin publishes his weekly article on a topic geared toward the small business community. The articles here are printed in their entirety.

Certified SCORE Mentor for the Southeast Minnesota Chapter

Key Topics

Practical Financial Planning Tools for Your Business