What is this I break even-
- To break even means to exactly cover costs – no profit but no loss either
- You can make these really cool graphs that show you just how much you need to sell to break even, and how much your sales could fall by before you make a loss
- Using these graphs is called break even analysis
- It’s used for planning strategies and applying for loans from the bank, for example
- It’s all to do with the break even point and the margin of safety
- I’m no artist, so you’ll have to cope with text instructions for now
(my Boston Matrix was pretty good, though, if you ask me…)
- Like with any graph, you’ll want an x axis and a y axis
- On the x-axis you plot the amount of sales
- On the y-axis you plot ‘money’. Both revenue and cost go on this scale.
- Go up to whatever your fixed costs are on the y axis, and draw a horizontal line
- This is your fixed costs line, and it’s not completely necessary, but it helps
- You also need a total costs line, which will start in the same place as the fixed costs line
- It’ll be diagonal, and you need to plot a point or two in order to draw it
- Say you sell 100… PS3s and the total cost of making and shipping them was… £9000, you plot a point at (100,9000), with which you can draw your diagonal line
- Do the same for the total revenue line: if you sell 10 Minecraft voucher codes at £5 each (not sure if that’s legal!) and make £50, then plot (10, 50) – 10 sales on the x-axis and £50 revenue on the y-axis
Reading the graphs
- Where the two diagonal lines (total revenue and total cost) cross over is the break-even point you’re looking for!
- Draw a dotted line down to see where it is along the x-axis
- This value is the amount of sales you have to achieve to break even
- Any more and you make a profit, any less and you make a loss
- Now, if you’re making a profit, you can draw another dotted vertical line at the amount of sales you’re achieving at the moment
- The space between this line and the break even point is the margin of safety
What it means
- You want a large margin of safety – it would mean you’re safe!
- A small margin of safety means you’re dangerously close to the break even point and you could start making a loss!
- If costs (your costs) rise, the break even point rises (and the margin of safety shrinks)
- If prices (what you charge people) rise, the break even point falls, etc.
- This allows businesses to use break even analysis to work out how much to charge
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