Fifty percent (50%) of small businesses fail within the first year because they fail to have a plan which they can implement to guide their operations. Many have never done a break even analysis and they continue to struggle, in many instances supporting the business from outside sources when the business should be supporting itself.

A break even analysis is essential to a successful business and will tell you exactly how much you must earn to pay all your expenses and leave your with zero profit. This is your starting point to making a profit. Let’s break this down.

The first step in breakeven is knowing all your expenses, direct costs and indirect costs. Direct costs are all those costs that are directly related to your sales; in other words, the cost of your sales or the cost of the products you sell. Your indirect costs are other costs that are not directly related to sales, for example, rent, insurance, salary, payroll taxes, and depreciation. Whether you have a sale or not, these are expenses that must be paid and are therefore indirect costs also known as fixed costs since they do not normally change from month to month.

Remember that your expenses include your salary. Some small business owners wait to see what is left at the end of the month after expenses are paid to take a salary. That is so wrong. If you want to develop a successful business, paying yourself a salary should be an integral part of your plan and the business has to develop sales to cover that cost. The profits of your business are not your salary.

If you make it a habit to take whatever is left from the business, you are not building a viable business, your cash flow will be negative, your income statement will show a net loss and your balance sheet will not show any growth in net worth for your business. Why be in business if your goal does not include growth? The very essence of being in business means consistent growth.

Once you are aware of all your expenses, i.e., every single item down to the paper clips and the coffee, you now know how much sales you must have in order to breakeven or have a zero profit.

Knowing your breakeven point helps you develop your sales strategy and your pricing point.

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