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When starting a new store, simply breaking isn’t your end goal, as you want to make a profit. However, break-even analysis is a crucial part of a business plan and it is the point where the sales revenue covers the cost of running the business. This isn’t an easy journey as most of the eCommerce businesses failing within starting months. Hence, knowing break-even analysis can help you plan your future, and it’s your key to mapping out a pricing strategy.
Well, it is a financial analysis that you can run anytime but generally, it is done before introducing a new product or service. It helps in predicting whether your business or product will stay put in the long run or not. Ultimately, it is the best way to know how your business will be in the future and that will help you plan out everything.
What is Break-even Analysis?
Wow! A break-even analysis is a tool that business owners use to define how strong their business is or at what point their business will break even, and start to become profitable. Meanwhile, break-even analysis a beneficial tool for determining the profitability of a business, product, or service.
The financial condition helps determine the number of products you need to sell to cover the cost of running a business. It is something like what you need to do and what’s not for your eCommerce business. For example, break-even analysis can help you determine how many mobile phones you need to sell to cover the cost of running a business or how many customers you need to serve to cover your office rent.
To understand break-even analysis well, you need to know the difference between fixed and variable costs:
Fixed Cost: expenses that occur irrespective of sell
Variable Cost: expenses that fluctuate as per sales
Why Break-even Analysis is Important for E-Commerce Businesses?
Now, you know the break-even analysis and how it works, but it is essential to understand why it’s important for eCommerce businesses.
- It helps you set clear, logical goals
You’re dealing with unit volumes, so it helps you see exactly what costs go into each unit of your stock, and how many units you need to sell each month to cover your operating costs. Using these figures, you can create a clear pricing strategy for your products, and identify where you need to change your sales tactics.
You’ll then how to set your sales targets and what you’re able to safely spend on acquisition so that you can build a profitable business.
- You’ll make smarter plans for the future
This can also help you determine if a new sales avenue is going to be profitable. You’ll be able to get peace of mind when migrating all your sales to your own central website or determine whether it’s worth the time and effort attending sales events.
It also helps you reduce potential business risk and by undertaking a break-even analysis before launching a new product. You’ll be able to easily tell if it’s unlikely to be profitable, and you can avoid sinking your time and money into something that ultimately won’t work out.
And from a growth point of view, it provides you with a tangible tool you can use when applying for finance, or enticing investors. By providing a clear break-even point for your business, you can demonstrate that you’ve mapped out your business cash flow and are planning for the future.
How to Perform Break-even Analysis?
To calculate break-even analysis, divide your total fixed costs by sale price per unit minus the variable cost per unit.
Break even point = Fixed costs/ Unit contribution margin
To calculate break even point, you need to determine your business fixed cost and variable cost.
Let’s suppose your company manufactures apparels and has the following production numbers:
Fixed Cost: Rs. 3,00,000
Variable Cost per Unit: Rs. 70
Sales Price per Unit: Rs. 100
As per these figures, the break-even units for your business are:
Break-Even Units: Fixed Cost / (Sales Price per Unit – Variable Cost per Unit) = Rs. 300000 / (Rs. 100 – Rs. 70) = 10,000 Units
And,
The break-even sales are:
Break-Even Sales = Unit Sale Price x Break Even Units = 100 x 10000 = Rs. 10,00,000
Benefits of Break-even Analysis?
The following are the benefits of break-even analysis for your business:
The first and foremost benefit you can avail from break-even analysis if you wish to apply for a business loan or want investors to invest in your business. You need to show them your plan and prove your business is trustworthy. In addition, if the analysis looks good to you, it will boost your confidence to proceed ahead.
Another benefit you can avail from break-even analysis is that you can price your products in a better manner. Effective product pricing is crucial as the entire future of the business depends on it. Product pricing makes or breaks your business. It ensures that you pay all your bills.
After deciding on an effective pricing strategy, you also think of the cost of producing the product. And we know that this cost is variable as you just need to cover fixed costs like rent and insurance. Performing a break-even analysis will help you meet your expenses efficiently.
A small business owner often forgets petty business expenses but they can add up to become a significant cost. Doing a break-even analysis can help you meet all the financial commitments with ease.
As discussed, by doing a break-even analysis, you will get an idea about how much you will need to earn profits. This will help you set sales goals and revenue targets for your entire team. If you have a clear number in mind, it will be easier to follow the targets.
It is not viable for the business owner if he takes decisions based on emotions or assumptions. It is important to make decisions based on facts, reports, and calculations. It will be easier to decide whether to start with the idea or not if you have the required data with you.
With the help of break-even analysis, you can limit the risk by avoiding the business idea that’s not viable. It will help you avoid failures and limit the financial strain you may incur due to bad business decisions. Hence, you can be realistic with the results of your choices.
Ending Up!
Now that you understand your business break-even point, it’s time to start making it as money-savvy as possible. So, if you are looking to reduce your expenses, get the best price with the break-even analysis strategy.
Need help in calculating the break-even point of your eCommerce store? M-connect Media can assist you with the help of professional eCommerce experts. Contact us to know more about us.
