Making profit in businesses is no longer a fantasy. You can easily earn millions of dollars out of a simple business idea. But to achieve so, you have to follow a very effective strategy – break-even analysis! It is more popular in conventional, offline businesses than online businesses. However, it can be applied in online businesses too, as far as, you carry it out in a very precise manner.
In this blog, we are going to discuss the same. I will explain everything about break-even analysis and how easily you can double your online business profit with it. To make this understanding more rational, I will apply the break-even analysis concept to the online e-scooter rental business.
But before all of this, let’s first wrap our minds around the very important pre-requirement called break-even-point.
What is the break-even point?
Break-even-point is nothing but a scenario or just a point where the total cost of the business and the revenue of that business are equal. In other words, it is a condition where you are neither making a profit nor making a loss. Still confused?
Please refer to the following image to understand this very easily.
As you can see from the graph, the break-even point is the point where the revenue and costs line intersect. In the broader term, you make ‘break-even’ in your business when you successfully sell a number of products that can cover the business cost. This means any sale beyond the break-even point is considered as the profit that is here in the graph is highlighted in green color.
So, now when you know about the break-even point, let’s understand break-even analysis and how you can derive financial benefits from it.
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What is a break-even analysis?
As the name suggests, the break-even analysis is a useful tool to determine where the break-even point of your company or a new product or service falls. In other words, it is the financial calculation to calculate the number of sales you have to achieve to cover the business costs and start making a profit. For instance, a break-even analysis lets you know the number of pencils you have to sell to cover the production cost, or how many e-scooters you have to rent out per day to cover the repairing cost and charging cost of that number of e-scooters.
Why you must do break-even analysis?
Break-even analysis can help your business to acquire financial stability in so many ways. Here are some of them.
- Once you know the break-even point of your business, you can price your product better.
- With the help of break-even analysis, you can also know the fixed costs like insurance or web development and ways to cover those fixed costs. The price you previously decide is the cost to produce the product, a variable cost.
- Break-even analysis is all about lying down all financial commitments of your business. So, it helps you to catch missing expenses if there is any.
- Perhaps the most fundamental use of the break-even analysis is the set revenue target – you know exactly how many products you have to sell to cross that break-even point.
- If you introduce break-even analysis in very vital business processes of your business, you can make smarter decisions as break-even analysis reveals all financial metrics to you.
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How to actualize a break-even analysis?
To carry out break-even analysis, you should rely on one very straightforward equation which is as follows.
Break-even point = fixed cost / (average price – variable cost)
This equation simply means that the number of units you have to sell to cover the cost and earn profit can be numbered by dividing the fixed cost with the net profit per unit sold.
However, to put this equation into practice, you should have data of your business such as fixed cost, average price, and variable cost.
Regardless of how many products or services you sell, the fixed cost stays the same. In many cases, it is the monthly expense of the company, such as insurance, billing, website maintenance, etc.
As the name suggests, variable costs don’t stay steady and fluctuate based on the number of products or services you sell. Variable cost includes material cost, commissions, payment processing to labor.
In the next section of this blog, let’s discuss the working example of break-even analysis enabled business – E-scooter rental business.
How to double profit with the break-even analysis?
Time-traveling to the first section of the blog, anything beyond the break-even point is considered as the profit. So, to maximize the profit, you need to lower the break-even point. By lowering down the break-even point, you automatically increase the revenue and decrease the cost.
Let’s understand this in a very broader term.
In the e-scooter rental business, charging cost and maintenance cost are major costs. If a business owner can reduce these two major costs, he can make more profit. However, he still needs to increase the revenue graph. For that, he can introduce more than one with the premium business model or make sure the usage rate of the e-scooters remains high. Thus, by reducing the costs and increasing the revenue, he can finally lower the break-even point and double the profit.
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In the nutshell
If you are having cold feet over a thought of losing money in any kind of business, learn to practice break-even analysis. It will give the idea of all financial metrics of the business and helps you to make more profit. All you need to do is define the break-even point. And plan to keep it lower by increasing revenue and decreasing fixed and variable costs.