Break even point - What it means!

NVArchitectNVArchitect Posts: 12subscriber
edited October 2008 in Grab Bag

Many new venture starters are least concerned with the concept of break even because they erroneously believe that they will be profitable from day one. Sadly, the vast majority of these ventures don’t survive because as any seasoned entrepreneur or new venture financier will tell you … it can take between 18 months to 2 years to get most new ventures to the point at which they produce a profit. These ventures die because they don’t have the working capital needed to support their losses until it reaches this point.




This point, where the venture moves from losses to profits, is called the break even point. This measure can be expressed as units sold per month, $ sales per month, customers served per month or even as a time to breakeven (i.e. 18 months after launch).




The formula for calculating your breakeven points in units per month is;


(Fixed costs per month)/(Selling price – Variable costs) with fixed costs being those costs that don’t change in proportion to a change in sales volume (i.e. Rent) and variable costs being those costs that do (i.e. purchase costs of goods sold).




No entrepreneur should start a new venture without knowing, believing and being able to defend that belief in their breakeven point.
The break even point represents a significant milestone for the entrepreneur for it is a point that vindicates their judgement in taking the risk to launch the venture. For more on this see my article on New venture breakeven point.

Comments

  • CreativeTopicsCreativeTopics Posts: 0subscriber
    You know, I was reading this thinking "duh".  But, after finishing your post I realized...  This is how I went at my life!  My `break even` point kept getting pushed back and next thing I knew I was $40,000.00 in debt with nothing to show for it!
    I wish I would could have read this five years ago, and connected it to financial well-being as a whole!
    Cheers, and keep up the no-nonsense approach to helping those starting out!
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