Many businesses don’t make money in their first years because it can take a lot of money to open a business (think of all the supplies, insurance, licensing fees and rent agreements you might need) and it could take some time to attract customers.
Understanding how much money your business makes and the costs associated with running the business are important for long-term success.
Your business’s break-even point is when the money you make from business sales covers your business’s expenses. While your goal may be to make money, not just cover expenses, reaching your break-even point is an important step on your path to profitability.
You can calculate the break-even point for each product or service you sell.
Using your break-even points
Once you’ve calculated your business’s break-even points, you can use this information along with your budget to make better business decisions. You can set goals for yourself and your staff, see how your break-even points change if you raise or lower prices or determine if it makes sense to offer a new product based on its costs.
And here’s a great tip if you want to make money rather than simply breaking even — add your desired profit to your fixed costs. For example, if you want to make a certain amount per a month, add up all your fixed business expenses and then add in that extra amount. Then aim to “break even” with the new fixed cost.
Calculating a product’s break-even point
You’ll need to know several pieces of information before doing break-even calculations:
Here are some helpful formulas to use. For these examples, assume it costs $1,000 a month to run your business, $5 to create your product and you sell it for $13:
Break-even point in terms of number of products = fixed cost / (product’s price - your average cost per product)
Profit and loss statements
A profit and loss statement, also called an income statement, revenue statement, t or simply profit and loss, can help you determine your business’s overall financial standing. It’s one of the three main financial statements for businesses — the other two are the balance sheet and cash-flow statement.
The profit and loss statement breaks down your income and expenses to reveal your profit over a specific period of time, such as a month, quarter, year or years. It uses a simple equation to determine this:
However, the profit and loss statement breaks down your different sources of income and expenses, helping you better understand how your business makes and spends money.
Using a profit and loss statement
You can find out important information by regularly reviewing your profit and loss statement. For example, you can compare your profits to previous periods to determine if your business is becoming more or less profitable. If you notice your business’s profits are going down over time, you might be able to quickly act and cut expenses or increase sales to remain profitable.
The profit and loss statement can also be helpful when you’re writing or updating a business plan. You can share it with lenders when you apply for a business loan, and you can use the numbers on your profit and loss statement to help you prepare and file your business’s tax documents.
Creating and reading a profit and loss statement
You could create your own profit and loss statement, or start with a template that you can fill in. Or, if you use accounting software, the software may also be able to create a profit and loss statement for your business.
If you’re creating your own profit and loss statement, you may want to use a spreadsheet. There’s a lot of addition and subtraction in the profit and loss statement, and a spreadsheet is less prone to errors and easier to use than doing the math on your own.
A profit and loss statement is generally broken down into different sections. profit and loss statements also use accounting terms that you might not know if you haven’t studied accounting before, and sometimes there are several names for the same thing.
Here’s a breakdown of the terms in the order that they appear on a profit and loss statement and what they mean:
Here are two more terms you may hear in relation to a profit and loss statement:
Those are the basics to a profit and loss statement. It isn’t very complicated on its own — it only requires addition and subtraction. The difficult part is making sure all the information you use is correct. To do this, you’ll want to make sure you have a good system for keeping business records, such as accounting software where you record every business sale and expenses.