Small business adviser

How do you understand my point of equilibrium important for my business?

Equilibrium analysis is a powerful tool for making business decisions and to conduct "what if" scenarios.

In the most basic level, your breakeven point is the level of sales at all costs (labor, rent, debt payments, cost of sales, etc.) are equal to their income. At present, there is no loss or gain, just covered its costs.

Breaking understanding, even for a home is important because it responds to questions near and dear to the heart of a new business owner: "When will I start showing a profit?" And "When can I start drawing a salary?"

For an existing business, we use equilibrium analysis to increase profits. You have four options to improve profitability:

• Sell more, or increase the volumes.

• Increase prices.

• Reduce your fixed expenses (rent, advertising, utilities, interest, wages).

• Reduce your variable costs - costs that increase with sales, such as commissions, inventory, raw.

For example, if you think hiring a new employee. You already have fixed costs of $ 200,000. The employee shall have a salary of $ 35,000. Their product costs $ 4 and sells for $ 5.50. How many units must sell to cover your original cost and the employee's salary?

• Fixed costs / contribution margin (selling price - cost) = breakeven point in units

• $ 235,000 / $ 1.50 = 156,667 units

If you want to make $ 20,000 in benefits, how many units will have to sell? If you offer a discount to boost sales, selling its product at $ 5, how many units will be sold to make the same $ 20,000? (See answers below.)

Now the question we face is, do they have the systems, equipment, etc, instead of producing that number of items or support the level of sales?

Equilibrium analysis helps the business owner understand the relationship between prices, volumes and costs, and is the key to the formation of a strategy to address the only thing we can always count on the business of change.