Do you know the cash break-even point of your business? My experience with small businesses is that It can take time for them to become profitable. Working with a cash flow projection for your business can help you figure out when you can expect to financially turn the tides. Here's everything you need to know about determining your company's cash break-even point.
What’s Affecting Your Cash Break-Even Point
When your business is new, your sales may be flourishing. However, the revenue you make may be flowing out faster in expenses than the amount coming in. Business startups have to figure out how to pay for expenses before income materializes, especially if sales are credit-based. These expenses include supplies from vendors, rent, salaries, utilities, marketing, and loan payments. Knowing how to manage cash effectively is critical for staying in business until revenue exceeds the total expenses.
What’s Your Cash Break-Even Point?
A cash flow projection can help you predict the amount and timing of business income and expenses over a specific period. It can help you determine if you need to borrow funding or reduce your expenses when money is tight. This forecast also enables you to figure out when your business will reach its cash break-even point.
A break-even analysis can leverage data concerning your fixed and variable expenses. By calculating your cash break-even point, you can analyze how many sales you need to generate and monitor your company's financial health. Your company will reach its break-even point when your expenses are equal to revenue, and you have zero profit.
How to Calculate Your Cash Break-Even Point
There are a couple of methods for calculating the cash break-even point for your business.
- One approach is based on the number of units sold. To calculate a break-even point based on units, subtract your variable costs per unit from its revenue. Then divide the unit's fixed costs by this number.
- The second method is based on points in sales dollars. To determine the cash break-even point, calculate your contribution margin by subtracting an item's variable costs from its selling price. Then divide the fixed costs of the unit by the contribution margin.
Uses for a Cash Break-Even Point Analysis
By analyzing your cash break-even point, you can determine a strategy for becoming profitable. You may discover you need to generate more sales or raise prices to break even. You may find that you may need to cut certain expenses to reach your goal. This break-even analysis is beneficial before starting a business to identify the risks involved. You may also want to consider conducting this analysis before launching any new product or service.
Reaching the cash break-even point for your business is a crucial step to becoming profitable. If you need assistance calculating your company's cash break-even point, contact Myrick CPA today. We offer a full range of financial management and accounting solutions to help your business be successful.
Stay safe, stay well, and stay tuned,
Charles and the Myrick CPA Team
Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting services for small business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.