A service based business can use break even point analysis to calculate the number of units it is required to sell in order to reach break even. As a service business does not normally have a physical product to sell it must first define the unit (clients numbers, labor hours, projects, jobs etc.) to be used in the analysis.
The target profit analysis can be used to quickly calculate the combination of number of units, selling price, cost price, and fixed costs needed for a business to achieve a given target operating profit. It is particularly useful for target profit pricing to determine the product selling price necessary to reach the target profit margin.
As a business expands, its operating costs increase, unfortunately, they do not increase gradually but tend to go up in steps. These step increases cause the break even point of the business to make step jumps. A business must be aware of this to ensure that any planned increase in operating expenses is matched by a rapid increase in revenue to bring the business back to a break even.
By knowing the break even revenue and the product unit selling price, it is possible to calculate the number of units which need to be sold for a business to generate sufficient gross margin to cover all the operating expenses needed to run the business.
This number is referred to as the break even units, and provides a useful tool for management to operate their business on a day to day basis.
The break even analysis is an important concept in the management of any business. It is the level of revenue where a business generates sufficient gross margin to cover all the operating expenses needed to run the business, and therefore makes a zero profit.
One of the most important things to know when starting a coffee shop or preparing a coffee shop business plan is how many coffees the business needs to sell each day in order to break even. With this figure to hand, it is possible to get an idea of the size of the premises needed, the number of coffee machines required and the number of staff necessary to operate the shop.
At break even, the profit from the coffee shop will be zero. When people discuss break even or break even point, they are simply referring to the level of revenue needed to cover the costs of operating the coffee shop business.
The Excel break even analysis calculator, available for download below, allows for up to four different options or scenarios to be considered at a time.
For each option, the unit selling price and cost price are entered and the gross margin and gross margin percentage are calculated. By entering a value for the fixed costs of the business, the break even revenue and the break even units are calculated.