how to write a break even analysis in a business plan

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5 Easy Steps to Creating a Break-Even Analysis

• What Break-Even is Used For

Gathering Information for Analysis

• Steps to Break-Even Analysis

Analyzing a Break-Even Chart

Break-even is one of those vital numbers that can mean success or failure to a small business. If you are breaking even your income is are equal to your costs. You have no profit or loss at this point. But, above the break-even point, every dollar of sales is pure profit.   

How to Use a Break-Even Analysis in Financial Planning

A break-even analysis is important in several different situations: 

• As your business plans new products, knowing the break-even point helps you price more efficiently.
• As you plan your overall business cash and profit strategy, break-even can be used to determine profit points for product lines. 
• As your business plans for financing, knowing your overall company breakeven point can help make your case for a business loan. 

A lender or investor will probably want to see this information in the financial report section of your business plan .

Before you begin your break-even analysis, you'll need some information. Let's say you're dong an analysis for a potential new product. Make a list of all your costs and expenses relating to that product, including facilities, the cost of materials and supplies, machines or equipment, and costs for paying employees to make the product and prepare it to ship.

You'll also need to know two other pieces of information:

• The range of prices you are considering, starting at $0.00
• The range of quantities you estimate being able to sell, starting at none (0)

You will need to separate out fixed costs and variable costs . Fixed costs are those you must pay even if you have no sales (like rent and utilities). Variable costs are those you spend to make and sell and ship products (like raw materials, supplies, and labor).

5 Steps to Creating a Break-Even Analysis

Here are the steps to take to determine break-even:

• Determine variable unit costs: Determine the variable costs of producing one unit of this product. Variable costs are those costs associated with making the product or buying it wholesale. If you are making a product, you will need to know the cost of all the components that go into that product. For example, if you are printing books, your variable unit costs are paper, binding, and glue for one book, and the cost to put one book together.
• Determine fixed costs: Fixed costs are costs to keep your business operating, even if you didn't produce any products. To determine fixed costs, add up the cost of running your factory for one month. These costs would include rent or mortgage, utilities, insurance, salaries of non-production employees, and all other costs. Don't forget the cost to design the product and packaging, make the prototype, and maybe patent your product.
• Determine unit selling price: Determine the unit selling price for your product. This price may change as you see where your break-even point is.
• Determine sales volume and unit price: The break-even point will change as the sales volume for this product and the unit price change.
• Create a spreadsheet: To do a break-even calculation, you will construct or use a spreadsheet then turn the spreadsheet into a graph. The spreadsheet will plot break-even for each level of sales and product price, and it will create a graph showing you break-even for each of these prices and sales volumes. 

A simple formula for break-even is:

Break-even quantity = Fixed costs/(Sales price per unit –Variable cost per unit).

This formula is best expressed in a spreadsheet because variable cost changes. The spreadsheet shows you break-even for a range of costs and sales prices.  

You can use Excel or another spreadsheet to create a break-even analysis chart. SCORE has an Excel template , or you can use this one form Microsoft . You'll need someone who's familiar with Excel to tweak the spreadsheet to your specific situation.

Now that you have break-even, what do you do with this information? You want to find the highest price you can sell the product at and still make a profit. See what happens when you change either fixed or variable costs to see what happens if you reduce them. Maybe you can increase the volume by finding new markets. What happens when output volume rises or falls. All of these can affect your business profits on this product.  

Of course, a break-even analysis isn't created in a vacuum. If you're creating a new product that no one's ever seen before, you have no idea what the volume would be or how soon competitors might pop up. But at least it gives you a way to begin your search for the "best" price for your product.

SCORE.org. " Break-Even Analysis Template ." Accessed Sept. 10, 2020.

Corporate Finance Institute. " Break Even Analysis ." Accessed Sept. 10, 2020.

Harvard Business Review. " A Quick Guide to Breakeven Analysis ." Accessed Sept. 10, 2020.

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Break-Even Analysis Explained—How to Find the Break-Even Point

Posted november 2, 2022 by kiara taylor.

Conducting a break-even analysis is a crucial tool for small business owners. If you’re planning on launching a business, writing a business plan , or just exploring a new product, knowing your break-even point can tell you whether or not a product or service is a good idea.

In this guide, we’ll cover what a break-even point is, why it’s critical to calculate, how to calculate it, and additional factors you should consider. 

What is the break-even point?

The break-even point is where an asset’s market price equals its original cost. Put another way; the break-even point is when the total revenues of a certain production level equal the total expenses of producing that product. For small business owners, it’s essentially the amount that you need to earn in order to cover your costs.  

Why you should know your break-even point

So, why is knowing your break-even point so important? Here are a few important reasons to consider.

Minimize risk

Risk comes in various forms , but break-even points can help you understand the viability of certain products before they’re even launched. 

For example, before even sending an order to a factory, you can already know how many units you need to sell and what expenses will go into making that product. Understanding this is key whether you’re launching a business for the first time or starting a new product line.

Identify unseen expenses

Running a break-even analysis forces you to outline all potential expenses associated with an initiative. Expenses that you’d otherwise miss without it. Usually, these expenses come from the fixed and variable costs of production. In this process, you can often identify unexpected expenses that you may not have considered before.

Appropriately price your products/services

Because your break-even point concerns the price relationship to your expenses, you can calculate different break-even points based on sold units or different pricing schemes. For example, you may find that your product is unprofitable at a certain price point except at extremely large scales. 

If that’s the case, you can explore higher price points. However, it’s important that you do not do this in isolation. Instead, use this exercise to understand potential pricing options and begin testing them with your target customers .

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If you’re seeking funding for your business, this information is often expected or required by lenders and investors . It helps them gauge the viability of your idea and determine what level of funding is appropriate. For you as a business owner, it can help you determine how much funding you think you’ll need and even identify how you’ll use those funds.

How to calculate the break-even point

To calculate your break-even point, you’ll need to know the following: 

• Fixed costs: Expenses that remain consistent no matter your sales volume.
• Variable costs: Expenses that change depending on your sales/production volume.
• Sales price: The price that you intend to sell the product/service for.

Break-even point formula

The break-even point is calculated using your fixed costs and your contribution margin. The contribution margin is the selling price of the product minus the total variable costs. Your selling price is usually the amount you place on any customer invoices. 

The contribution margin formula is:

Contribution Margin = Selling Price – Total Variable Costs

Once you have the contribution margin, you then take the total fixed costs per unit and divide those costs by the contribution margin. This will give you the break-even number of units required to offset your costs.

The break-even point formula is:

Break-Even Point = Fixed Costs / Contribution Margin

Break-even point example

Now that you know the formula for calculating your break-even point let’s put it into practice.

Imagine you are the owner of a small paper company and considering adding a new line of paper to your available products. You expect to sell a ream of paper for $5.00. 

The variable costs of the ream of the paper include: 

• $1.00 for the paper itself
• $0.50 for the packaging of the ream
• $0.50 of costs to package each ream

According to this information, you have $2.00 in variable costs. Using the formula mentioned above, we can calculate the contribution margin for your paper ream:

$5.00 – $2.00 = $3.00

Next, we’ll incorporate fixed costs to determine how many units need to be sold. After holding an office meeting in the conference room, you determine that the following fixed costs are associated with producing reams of paper:

• $50.00 in salaries
• $50.00 in office rent
• $50.00 for monthly shipments from the paper factory

Your total fixed costs come to: $50.00 + $50.00 + $50.00 = $150.00.

Lastly, we’ll calculate the break-even point: $150.00 / $3.00 = 50 units. To break even, you would need to sell 50 reams of paper. 

Maximizing your break-even point formulas

You can also utilize this calculation to figure out your break-even point in dollars. This is done by dividing the total fixed costs by the contribution margin ratio. You can figure out your contribution margin ratio by taking the contribution margin per unit and dividing it by the sales price. 

Your contribution margin ratio using the data from the above example is:

$3.00 (your contribution margin) / $5.00 (price per one ream of paper) = 60%.

Finally, divide your total fixed costs ($150.00) by your contribution margin ratio (60%) to calculate the break-even point in dollars:

$150.00 / 60% = $250.00 in sales

You can confirm your findings by multiplying your break-even point in units (50) by the sales price ($5.00):

50 x $5.00 = $250.00

What is a standard break-even time period?

The standard break-even period is hard to predict and fully depends on your business. However, once you know your break-even point, you can gauge the time it will take to break even more accurately.

Your break-even period is the amount of time it takes you to sell enough units to break even. This means that the only thing holding back your ability to break even is how fast you sell your units.

The formula to calculate your break-even time period is:

Break-Even Time Period = Break-Even Units / Amount Sold per Period (Period)

If we return to the paper company example, we can estimate what the break-even period is. After reviewing your financials, you learn that the average number of reams you expect to sell daily is 5. Now, take your number of break-even units (50) and divide them by the amount sold in a given period (5):

50 / 5 = 10. Under this analysis, you would break even in approximately 10 days.

However, it’s important to remember that fixed costs, which are an important part of calculating your break-even point, may accumulate faster than you can sell your product. In that case, you’ll need to factor this into your analysis.

How to lower your break-even point

Everyone wants to lower their break-even point because it typically leads to greater profitability at a faster rate. But how do you lower your break-even point? The key thing to remember is that it’s a ratio of your fixed and variable costs. To reduce your break-even point, you’ll need to lower one or both.

One of the most efficient ways to reduce your break-even point is to start by reducing variable costs. Keep in mind that variable costs are associated with each unit. Other fixed costs, those that exist regardless, like the $20-$80 you pay for your employees’ no medical life insurance every month, can be more difficult to eliminate because they are essential.

What you can do with a break-even analysis

Conducting an initial break-even analysis is incredibly useful when starting a business. But, did you know that you can use it on an ongoing basis as part of your management process ? Here are a few key uses you can leverage.

Determine if your prices are correct

A break-even analysis can be used to continuously audit and fine-tune your pricing strategy. If you find sales are missing expectations, you can reference this calculation to easily understand what quantities must be sold if you decide to adjust the price. 

Explore current fixed and variable costs

You can also explore how different costs impact your bottom line. At the end of the day, your business needs to know what costs are impacting its ability to generate revenue. A break-even analysis can help you understand whether some products may be costing you more money than their worth. For example, products with low contribution margins or ratios might be too expensive to keep in production.

Narrow down financial scenarios

Finally, you can use your break-even analyses as part of any forecast scenarios that you explore. By changing numbers in your formula, you can test different types of prices and quantities based on perceived consumer interest. This can help inform a larger analysis of your sales, cash, and expenses based on how reasonable your price and volume adjustments are.

Other metrics to consider

Now that you understand break-even points and break-even analysis, you’ll be able to put them to work for your business. Remember, this is just a piece of measuring business performance and there are other valuable metrics you should be tracking. You can do this manually with spreadsheets, leverage budgeting and accounting software, or better explore future performance with LivePlan’s performance tracking and forecasting features .

Whatever option you choose, the important thing is that you are aware of these metrics and actively using them. It will help you better understand the health of your business, make more strategic decisions, and ultimately grow your business.

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What is Break-Even Analysis?

What is the break-even analysis formula, break-even analysis example, graphically representing the break-even point, free cost-volume-profit analysis template, download the free template, interpretation of break-even analysis, sensitivity analysis.

• Factors that Increase a Company’s Break-Even Point

How to reduce the break-even point

Additional resources, break even analysis.

The point in which total cost and total revenue are equal

Break-even analysis in economics, business, and cost accounting refers to the point at which total costs and total revenue are equal. A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs ( fixed and variable costs ).

Key Highlights

• Break-even analysis refers to the point at which total costs and total revenue are equal.
• A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs.
• Break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

The formula for break-even analysis is as follows:

Break-Even Quantity = Fixed Costs / (Sales Price per Unit – Variable Cost Per Unit)

• Fixed Costs are costs that do not change with varying output (e.g., salary, rent, building machinery)
• Sales Price per Unit is the selling price per unit
• Variable Cost per Unit is the variable cost incurred to create a unit

It is also helpful to note that the sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95 is the contribution margin per unit and contributes to offsetting the fixed costs.

Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the break-even point of Company A’s premium water bottle:

Break Even Quantity = $100,000 / ($12 – $2) = 10,000

Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to sell 10,000 units of water bottles to break even.

For more information about variable costs, check out the following video:

The graphical representation of unit sales and dollar sales needed to break even is referred to as the break-even chart or cost-volume-profit (CVP) graph. Below is the CVP graph of the example above:

Explanation:

• The number of units is on the X-axis (horizontal) and the dollar amount is on the Y-axis (vertical).
• The red line represents the total fixed costs of $100,000.
• The blue line represents revenue per unit sold. For example, selling 10,000 units would generate 10,000 x $12 = $120,000 in revenue.
• The yellow line represents total costs (fixed and variable costs). For example, if the company sells 0 units, then the company would incur $0 in variable costs but $100,000 in fixed costs for total costs of $100,000. If the company sells 10,000 units, the company would incur 10,000 x $2 = $20,000 in variable costs and $100,000 in fixed costs for total costs of $120,000.
• The break even point is at 10,000 units. At this point, revenue would be 10,000 x $12 = $120,000 and costs would be 10,000 x 2 = $20,000 in variable costs and $100,000 in fixed costs.
• When the number of units exceeds 10,000, the company would be making a profit on the units sold. Note that the blue revenue line is greater than the yellow total costs line after 10,000 units are produced. Likewise, if the number of units is below 10,000, the company would be incurring a loss. From 0-9,999 units, the total costs line is above the revenue line.

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As illustrated in the graph above, the point at which total fixed and variable costs are equal to total revenues is known as the break-even point. At the break-even point, a business does not make a profit or loss. Therefore, the break-even point is often referred to as the “no-profit” or “no-loss point.”

The break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

Therefore, the concept of break-even point is as follows:

• Profit when Revenue > Total Variable Cost + Total Fixed Cost
• Break-even point when Revenue = Total Variable Cost + Total Fixed Cost
• Loss when Revenue < Total Variable Cost + Total Fixed Cost

Break-even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling . Using Goal Seek in Excel, an analyst can backsolve how many units need to be sold, at what price, and at what cost to break even.

Factors that Increase a Company’s Break-Even Point

It is important to calculate a company’s break-even point in order to know the minimum target to cover production expenses. However, there are times when the break-even point increases or decreases, depending on certain of the following factors:

1. Increase in customer sales

When there is an increase in customer sales, it means that there is higher demand. A company then needs to produce more of its products to meet this new demand which, in turn, raises the break-even point in order to cover the extra expenses.

2. Increase in production costs

The hard part of running a business is when customer sales or product demand remains the same while the price of variable costs increases, such as the price of raw materials. When that happens, the break-even point also goes up because of the additional expense. Aside from production costs, other costs that may increase include rent for a warehouse, increases in salaries for employees, or higher utility rates.

3. Equipment repair

In cases where the production line falters, or a part of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even.

In order for a business to generate higher profits, the break-even point must be lowered. Here are common ways of reducing it:

1. Raise product prices

This is something that not all business owners want to do without hesitation, fearful that it may make them lose some customers.

2. Outsourcing

Profitability may be increased when a business opts for  outsourcing , which can help reduce manufacturing costs when production volume increases.

Every company is in business to make some type of profit. However, understanding the break-even number of units is critical because it enables a company to determine the number of units it needs to sell to cover all of the expenses it’s accrued during the process of creating and selling goods or services.

Once the break-even number of units is determined, the company then knows what sales target  it needs to set in order to generate profit and reach the company’s financial goals.

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• HR & Payroll

Break-Even Analysis Explained - Full Guide With Examples

Did you know that 30% of operating small businesses are losing money? Running your own business is trickier than it sounds. You have to plan ahead carefully to break-even or be profitable in the long run.

Building your own small business is one of the most exciting, challenging, and fun things you can do in this generation.

To start and sustain a small business it is important to know financial terms and metrics like net sales, income statement and most importantly break-even point .

Performing break-even analysis is a crucial activity for making important business decisions and to be profitable in business.

So how do you do it? That is what we will go through in this article. Some of the key takeaways for you when you finish this guide would be:

• Understand what break-even point is
• Know why it is important
• Learn how to calculate break-even point
• Know how to do break-even analysis
• Understand the limitations of break-even analysis

So, if you are tired of your nine-to-five and want to start your own business, or are already living your dream, read on.

What is Break-Even Point?

Small businesses that succeeds are the ones that focus on business planning to cross the break-even point, and turn profitable .

In a small business, a  break-even point is a point at which total revenue equals total costs or expenses. At this point, there is no profit or loss — in other words, you 'break-even'.

Break-even as a term is used widely, from stock and options trading to corporate budgeting as a margin of safety measure.

On the other hand, break-even analysis lets you predict, or forecast your break-even point. This allows you to course your chart towards profitability.

Managers typically use break-even analysis to set a price to understand the economic impact of various price and sales volume calculations.

The total profit at the break-even point is zero. It is only possible for a small business to pass the break-even point when the dollar value of sales is greater than the fixed + variable cost per unit.

Every business must develop a break-even point calculation for their company. This will give visibility into the number of units to sell, or the sales revenue they need, to cover their variable and fixed costs.

Importance of Break-Even Analysis for Your Small Business

A business could be bringing in a lot of money; however, it could still be making a loss. Knowing the break-even point helps decide prices, set sales targets, and prepare a business plan.

The break-even point calculation is an essential tool to analyze critical profit drivers of your business, including sales volume, average production costs, and, as mentioned earlier, the average sales price. Using and understanding the break-even point, you can measure

• how profitable is your present product line
• how far sales drop before you start to make a loss
• how many units you need to sell before you make a profit
• how decreasing or increasing price and volume of product will affect profits
• how much of an increase in price or volume of sales you will need to meet the rise in fixed cost

How to Calculate Break-Even Point

There are multiple ways to calculate your break-even point.

Calculate Break-even Point based on Units

One way to calculate the break-even point is to determine the number of units to be produced for transitioning from loss to profit.

For this method, simply use the formula below:

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Fixed costs are those that do not change no matter how many units are sold. Don't worry, we will explain with examples below. Revenue is the income, or dollars made by selling one unit.

Variable costs include cost of goods sold, or the acquisition cost. This may include the purchase cost and other additional costs like labor and freight costs.

Calculate Break-Even Point by Sales Dollar - Contribution Margin Method

Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

Let’s take a deeper look at the some common terms we have encountered so far:

• Fixed costs: Fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, office furniture, computer units, and software. Fixed costs also include payment for services like design, marketing, public relations, and advertising.
• Contribution margin:   Is calculated by subtracting the unit variable costs from its selling price. So if you’re selling a unit for $100 and the cost of materials is $30, then the contribution margin is $70. This $70 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.
• Contribution margin ratio: is calculated by dividing your fixed costs from your contribution margin. It is expressed as a percentage. Using the contribution margin, you can determine what you need to do to break-even, like cutting fixed costs or raising your prices.
• Profit earned following your break-even: When your sales equal your fixed and variable costs, you have reached the break-even point. At this point, the company will report a net profit or loss of $0. The sales beyond this point contribute to your net profit.

Small Business Example for Calculating Break-even Point

To show how break-even works, let’s take the hypothetical example of a high-end dressmaker. Let's assume she must incur a fixed cost of $45,000 to produce and sell a dress.

These costs might cover the software and materials needed to design the dress and be sure it meets the requirement of the brand, the fee paid to a designer to design the look and feel of the dress, and the development of promotional materials used to advertise the dress.

These costs are fixed as they do not change per the number of dresses sold.

The variable costs would include the materials used to make each dress — embellishment’s for $30, the fabric for the body for $20, inner lining for $10 — and the labor required to assemble the dress, which amounted to one and a half hours for a worker earning $50 per hour.

Thus, the unit variable costs to make a single dress is $110 ($60 in materials and $50 in labor). If she sells the dress for $150, she’ll make a unit margin of $40.

Given the $40 unit margin she’ll receive for each dress sold, she will cover her $45,500 total fixed cost will be covered if she sells:

Break-Even Point (Units) = $45,000 ÷ $40 = 1,125 Units

You can see per the formula , on the right-hand side, that the Break-even is 1,125 dresses or units

In other words, if this dressmaker sells 1,125 units of this particular dress, then she will fully recover the $45,000 in fixed costs she invested in production and selling. If she sells fewer than 1,125 units, she will lose money. And if she sells more than 1,125 units, she will turn a profit. That’s the break-even point.

What if we change the price?

Suppose our dressmaker is worried about the current demand for dresses and has concerns about her firm’s sales and marketing capabilities, calling into question her ability to sell 1,125 units at a price of $150. What would be the effect of increasing the price to $200?

This would increase the unit margin to $90.Then the number of units to be sold would decline to 500 units. With this information, the dressmaker could assess whether she was better off trying to sell 1,125 dresses at $150 or 500 dresses at $200, and priced accordingly.

What if we want to make an investment and increase the fixed costs?

Break-even analysis also can be used to assess how sales volume would need to change to justify other potential investments. For instance, consider the possibility of keeping the price at $150, but having a celebrity endorse the dress (think Madonna!) for a fee of $20,000.

This would be worthwhile if the dressmaker believed that the endorsement would result in total sales of $66,000 (the original fixed cost plus the $20,000 for Ms. Madonna).

With the Fixed Costs at $66,000 we see, it would only be worthwhile if the dressmaker believed that the endorsement would result in total sales of 1,650 units.

In other words, if the endorsement led to incremental sales of 525 dress units, the endorsement would break-even. If it led to incremental sales of greater than 525 dresses, it would increase profits.

What if we change the variable cost of producing a good?

Break-even also can be used to examine the impact of a potential change to the variable cost of producing a good.

Imagine that our dressmaker could switch from using a rather plain $20 fabric for the dress to a higher-end $40 fabric, thereby increasing the variable cost of the dress from $110 to $130 and decreasing the unit margin from $40 to $20. How much would your sales need to increase to compensate for the extra cost?

Suppose the Variable Cost is $130 (and the Fixed Cost is $45,000 – our dressmaker can’t afford to have nice fabric plus get Ms. Madonna). It would make better sense to switch to the nicer fabric if the dressmaker thought it would result in sales of 2,250 units, an additional 1125 dresses, which is double the number of initial sale numbers.

You likely aren’t a dressmaker or able to get a celebrity endorsement from Ms. Madonna, but you can use break-even analysis to understand how the various changes of your product, from revenue, costs, sales, impact your small business’s profitability .

What Are the Benefits of Doing a Break-even Analysis?

Smart Pricing : Finding your break-even point will help you price your products better. A lot of effort and understanding goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.

Cover Fixed Costs : When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You will still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.

Avoid Missing Expenses : When you do a break-even analysis, you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a business idea.  This will limit the number of surprises down the road.

Setting Revenue Targets : After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set better sales goals for you and your team.

Decision Making : Usually, business decisions are based on emotion. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.

Manage Financial Strain : Doing a break-even analysis will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes by being aware of the risks and knowing when to avoid a business idea.

Business Funding : For any funding or investment, a break-even analysis is a key component of any business plan. You have to prove your plan is viable. It’s usually a requirement if you want to take on investors or other debt to fund your business.

When to Use Break-even Analysis

Starting a new business.

If you’re thinking about a small online business or e-commerce, a break-even analysis is a must. Not only does it help you decide if your business idea is viable, but it makes you research and be realistic about costs, as well as think through your pricing strategy.

Creating a new product

Especially for a small business, you should still do a break-even analysis before starting or adding on a new product in case that product is going to add to your expenses. There will be a need to work out the variable costs related to your new product and set prices before you start selling.

Adding a new sales channel

If you add a new sales channel, your costs will change. Let's say you have been selling online, and you’re thinking about opening an offline store; you’ll want to make sure you at least break-even with the brick and mortar costs added in. Adding additional marketing channels or expanding social media spends usually increases daily expenses. These costs need to be part of your break-even analysis.

Changing the business model

Let's say you are thinking about changing your business model; for example, switching from buying inventory to doing drop shipping or vice-versa, you should do a break-even analysis. Your costs might vary significantly, and this will help you figure out if your prices need to change too.

Limitations of Break-even Analysis

• The Break-even analysis focuses mostly on the supply-side (i.e., costs only) analysis. It doesn't tell us what sales are actually likely to be for the product at various prices.
• It assumes that fixed costs are constant. However, an increase in the scale of production is likely to lead to an increase in fixed costs.
• It assumes average variable costs are constant per unit of output, per the range of the number of sales
• It assumes that the number of goods produced is equal to the number of goods sold. It believes that there is no change in the number of goods held in inventory at the beginning of the period and the number of goods held in inventory at the end of the period
• In multi-product companies,  the relative proportions of each product sold and produced are fixed or constant.

So that's a wrap. Hope you found this article interesting and informative. Feel free to subscribe to our blog to get updates on awesome new content we publish for small business owners.

Key Takeaways

Break-even analysis is infinitely valuable as it sets the framework for pricing structures, operations, hiring employees, and obtaining future financial support.

• You can identify how much, or how many, you have to sell  to be profitable.
• Identify costs inside your business that should be alleviated or eliminated.

Remember, any break-even analysis is only as strong as its underlying assumptions.

Like many forecasting metrics, break-even point is subject to it's limitations; however it can be a powerful and simple tool to provide a small business owner with an idea of what their sales need to be in order to start being profitable as quickly as possible.

Lastly, please understand that break-even analysis is not a predictor of demand .

If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point. To avoid this, make sure you have done the groundwork before setting up your business.

Head over to our small business guide on setting up a new business if you want to know more.

Want to calculate break even point quickly? Use our handy break-even point calculator.

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A Quick Guide to Breakeven Analysis

It’s a simple calculation, but do you know how to use it?

In a world of Excel spreadsheets and online tools, we take a lot of calculations for granted. Take breakeven analysis. You’ve probably heard of it. Maybe even used the term before, or said: “At what point do we break even?” But because you may not entirely understand the math — and because understanding the formula can only deepen your understanding of the concept — here’s a closer look at how the concept works in reality.

• Amy Gallo is a contributing editor at Harvard Business Review, cohost of the Women at Work podcast , and the author of two books: Getting Along: How to Work with Anyone (Even Difficult People) and the HBR Guide to Dealing with Conflict . She writes and speaks about workplace dynamics. Watch her TEDx talk on conflict and follow her on LinkedIn . amyegallo

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What Is Break-Even Analysis?

Break-even point formula.

• Calculating BEP and Contribution Margin

Who Calculates the BEP?

Why break-even analysis matters, the bottom line.

• Investing Basics

Break-Even Analysis: Formula and Calculation

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Break-even analysis compares income from sales to the fixed costs of doing business. Five components of break-even analysis include fixed costs, variable costs, revenue, contribution margin, and break-even point (BEP). When companies calculate the BEP, they identify the amount of sales required to cover all fixed costs to begin generating a profit. The break-even point formula can help find the BEP in units or sales dollars.

Key Takeaways:

• Using the break-even point formula, businesses can determine how many units or dollars of sales cover the fixed and variable production costs.
• The break-even point (BEP) is considered a measure of the margin of safety.
• Break-even analysis is used broadly, from stock and options trading to corporate budgeting for various projects.

Investopedia / Paige McLaughlin

Break-even analysis involves a calculation of the break-even point (BEP) . The break-even point formula divides the total fixed production costs by the price per individual unit, less the variable cost per unit.

BEP = Fixed Costs / (Price Per Unit - Variable Cost Per Unit)

Break-even analysis looks at the fixed costs relative to the profit earned by each additional unit produced and sold. A firm with lower fixed costs will have a lower break-even point of sale and $0 of fixed costs will automatically have broken even with the sale of the first product, assuming variable costs do not exceed sales revenue. Fixed costs remain the same regardless of how many units are sold. Examples of fixed and variable costs include:

Calculating the Break-Even Point and Contribution Margin

Break-even analysis and the BEP formula can provide firms with a product's contribution margin. The contribution margin is the difference between the selling price of the product and its variable costs. For example, if an item sells for $100, with fixed costs of $25 per unit, and variable costs of $60 per unit, the contribution margin is $40 ($100 - $60). This $40 reflects the revenue collected to cover the remaining fixed costs, which are excluded when figuring the contribution margin.

Contribution Margin = Item Price - Variable Cost Per Unit

To find the total units required to break even, divide the total fixed costs by the unit contribution margin. Assume total fixed costs are $20,000. With a contribution margin of $40 above, the break-even point is 500 units ($20,000 divided by $40). Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0.

BEP (Units) = Total Fixed Costs / Contribution Margin

To calculate the break-even point in sales dollars, divide the total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the sale price.

Contribution Margin Ratio = Contribution Margin Per Unit / Item Price

BEP (Sales Dollars) = Total Fixed Costs / Contribution Margin Ratio

The contribution margin ratio is 40% ($40 contribution margin per item divided by $100 sale price per item). The break-even point in sales dollars is $50,000 ($20,000 total fixed costs divided by 40%).

In accounting, the margin of safety is the difference between actual sales and break-even sales. Managers utilize the margin of safety to know how much sales can decrease before the company or project becomes unprofitable.

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• Stock and Option Traders
• Government Agencies

Although investors are not interested in an individual company's break-even analysis on their production, they may use the calculation to determine at what price they will break even on a trade or investment. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product.

• Pricing : Businesses get a comprehensible perspective on their cost structure with a break-even analysis, setting prices for their products that cover their fixed and variable costs and provide a reasonable profit margin.
• Decision-Making : When it comes to new products and services, operational expansion, or increased production, businesses can chart their profit to sales volume and use break-even analysis to help them make informed decisions surrounding those activities.
• Cost Reduction : Break-even analysis helps businesses find areas to reduce costs to increase profitability.
• Performance Metric: Break-even analysis is a financial performance tool that helps businesses ascertain where they are in achieving their goals.

What Are Some Limitations of Break-Even Analysis?

Break-even analysis assumes that the fixed and variable costs remain constant over time. Costs may change due to factors such as inflation, changes in technology, or changes in market conditions. It also assumes that there is a linear relationship between costs and production. Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences.

What Are the Components of Break-Even Analysis?

There are five components of break-even analysis including fixed costs, variable costs, revenue, contribution margin, and the break-even point (BEP).

Why Is the Contribution Margin Important in Break-Even Analysis?

The contribution margin represents the revenue required to cover a business' fixed costs and contribute to its profit. Through the contribution margin calculation, a business can determine the break-even point and where it can begin earning a profit.

How Do Businesses Use the Break-Even Point in Break-Even Analysis?

The break-even point (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies. A business would not use break-even to measure its repayment of debt or how long that repayment will take to complete.

Break-even analysis is a tool used by businesses and stock and option traders. Break-even analysis is essential in determining the minimum sales volume required to cover total costs and break even. It helps businesses choose pricing strategies, and manage costs and operations. In stock and options trading, break-even analysis helps find the minimum price movements required to cover trading costs and make a profit. Traders can use break-even analysis to set realistic profit targets, manage risk, and make informed trading decisions.

U.S. Small Business Administration. " Break-Even Point ."

Professor Rosemary Nurre, College of San Mateo. " Accounting 131: Chapter 6, Cost-Volume-Profit Relationships ."

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Exploring Break Even Analysis Business Plan: Strategies for Success

Break-even analysis is pivotal in a business plan to ensure financial viability. It outlines the point at which costs and revenue equalize, signaling no net loss or gain.

Developing a business plan requires a solid understanding of when the investment will start paying off. Break-even analysis emerges as a critical tool in this scenario, assisting entrepreneurs and managers in strategic planning and decision-making. This mathematical approach determines the necessary sales volume at a set price point to cover all costs, signifying the threshold of profitability.

By incorporating break-even analysis, businesses can set realistic financial targets, prepare for future investments, and manage cash flow more effectively. It serves as a vital compass for startups and established firms alike, enabling them to map out their financial journey with clarity and precision. Effectively leveraging this tool can mean the difference between a business flourishing or floundering, thus it constitutes a linchpin in any robust business plan.

Introduction To Break Even Analysis In Business Planning

Imagine starting a journey without knowing your destination. That’s business without break even analysis. It’s a map for your venture, showing when costs meet revenue. By knowing this point, you can make smart choices. Let’s explore this crucial tool in the business toolkit.

Defining Break Even Analysis: What It Is And Why It’s Important

Break even analysis is a simple way to understand your business finances. It answers a key question: “How much must I sell to cover my costs?” Knowing this helps avoid losses and plan for profit. It’s like knowing how much fuel you need for a trip.

The Role Of Break Even Analysis In Strategic Business Planning

Strategy means planning ahead. Break even analysis guides your strategy. It shows the sales needed to pay the bills. With this info, you set goals. You price better. You control cost. It’s your business compass, pointing to financial safety.

Understanding Costs: Fixed Vs. Variable Costs And Their Impact On Break Even

Costs in business are like ingredients in a recipe. Some are fixed costs , like rent, stable over time. Others are variable costs , changing with production, like materials. Knowing these helps find your break even point. It’s like balancing ingredients for the perfect dish.

Step-by-step Process Of Conducting A Break Even Analysis

Knowing when your business will start making a profit is vital. Break even analysis helps achieve that. It’s a simple yet powerful tool. Let’s walk through the steps one by one.

Identifying Costs: Distinguishing Between Fixed and Variable

Identifying Costs: Distinguishing Between Fixed And Variable

First, understand your costs . Costs come in two types: fixed and variable.

• Fixed costs stay the same. Think rent and salaries.
• Variable costs change. They depend on how much you sell.

Calculating the Break Even Point: Formulas and Practical Examples

Calculating The Break Even Point: Formulas And Practical Examples

Next is finding your break even point. It’s where costs equal revenue. No profit, no loss.

Use this formula : Fixed Costs / (Price – Variable Costs per Unit).

Analyzing Sales Volume: How to Determine the Necessary Levels for Profits

Analyzing Sales Volume: How To Determine The Necessary Levels For Profits

After the break even point, profits start. Aim for a sales volume higher than this point.

To find it , estimate how many products you need to sell. Make sure it’s more than the break even units.

Evaluating Pricing Strategies: Their Effect on Break Even Outcomes

Evaluating Pricing Strategies: Their Effect On Break Even Outcomes

Your pricing can change everything. It affects your break even point. Go for a price that covers costs and brings profit.

Think about : Cost-based pricing, value-based pricing, and competition pricing.

For each strategy, recalculate your break even point. Look for the best balance.

Utilizing Break Even Analysis To Drive Business Decisions

Utilizing Break Even Analysis to Drive Business Decisions is key for any business plan aiming for long-term success. This powerful tool helps owners understand when a company will be able to cover all its expenses and start making a profit. This insight guides strategic choices across various aspects of the business. Let’s explore how break even analysis can shape your business strategies.

Pricing Decisions: Using Break Even Analysis To Set Competitive Prices

Price is crucial in staying competitive. Break even analysis helps set prices that cover costs while remaining attractive to customers. It takes into account fixed and variable costs and the number of units you need to sell. By understanding this, you set prices that not only cover costs but also allow for a profit.

Cost Control: How Break Even Analysis Influences Cost Management

Keeping costs under control is vital. Break even analysis makes you spot high costs that need attention . It shows how lowering certain costs can reduce the break even point, allowing for an earlier return to profitability. This influences decisions about where to cut costs without reducing quality.

Profit Planning: Adopting A Break Even Perspective For Strategic Planning

Break even analysis is not just about covering costs. It’s about planning for profit . This view helps businesses set realistic sales goals and strategize on ways to exceed the break even point. This ensures a solid plan for generating profits after the initial goals are met.

Scenario Analysis: Assessing The Impact Of Market Changes Based On Break Even Points

Markets change, and businesses must adapt. Scenario analysis is about preparing for these changes. Using break even points, businesses can see how market shifts — like rising costs or falling prices — will affect them. This is key for making informed decisions ahead of time.

Challenges And Limitations Of Break Even Analysis

Break even analysis is a fundamental financial tool. It helps businesses determine when they will start making a profit. Yet, this analysis is not without its challenges. Critics often point out issues with its simplicity and assumptions. It is vital to recognize the challenges and limitations when incorporating it into your business plan.

Addressing The Oversimplification Critique In Break Even Analysis

Break even analysis can be deceptively simple. It assumes all units are sold. It also assumes prices and costs stay constant. Real-world scenarios are more complex. Costs can change. Sales volumes can fluctuate. It is crucial to add layers of detail to this model:

• Identify variable and fixed costs accurately.
• Assess the potential for cost changes and adjust the analysis accordingly.
• Review historical sales data to predict reasonable estimates for future sales volumes.

Managing Uncertainty And Variability In Cost And Price Assumptions

Uncertainty is a constant in business. Prices fluctuate. Market conditions vary. It can affect both costs and revenue. To manage this:

• Implement regular reviews of your break even analysis.
• Use multiple scenarios to understand different outcomes.
• Stay prepared with flexible strategies for unexpected changes.

Integrating Break Even Analysis With Other Financial Tools For Holistic Planning

Relying solely on break even analysis can be a pitfall. Other tools can give a more complete financial picture. For example, cash flow forecasts and ROI calculations offer additional insights. Combine them with your break even analysis. This approach ensures more robust and accurate financial planning .

Case Studies And Real-world Applications Of Break Even Analysis

Understanding how businesses achieve their financial targets is eye-opening. Break-even analysis illuminates this path. Through real-life cases, we see its role in planning and decision-making across diverse industries.

Small Business Success Stories: Break Even In Action

Small-scale ventures find break-even analysis vital. It’s a tool for survival and growth. Here’s how some enterprises made it work:

• A local bakery controlled ingredient costs to match sales.
• An indie bookstore used break-even points to manage inventory and staffing.

Adapting Break Even Analysis For Service-oriented Businesses

Service firms have intangible offerings. They adapt break-even analysis uniquely:

• Consulting firms consider hours as inventory and calculate service costs.
• Salons leverage the model to plan service pricing and promotions.

Break Even Analysis In Manufacturing: A Sector-specific Look

Manufacturing businesses use break-even analysis to streamline production. Efficiency is key. Success in this sector often means:

• Matching output with demand to avoid excess inventory.
• Investing in technology that reduces production costs.

Innovation And Break Even Analysis: Adapting The Model For New Business Ventures

New ventures push the envelope on traditional models. Innovative startups customize break-even analysis:

• They assess market readiness for novel products.
• They predict scale-up costs and revenue timelines accurately.

Strategies For Success: Optimizing Your Business Plan With Break Even Analysis

Break-even analysis is a key financial tool that helps businesses understand when they will start generating profit. It considers costs and revenues to determine the sales needed to cover expenses . This section explores strategies that make break-even analysis an invaluable component of a successful business plan.

Integrating Break Even Analysis Within The Business Planning Process

Integrating break-even analysis into your business plan requires a step-by-step approach:

• Identify fixed and variable costs that affect your business.
• Determine the average price of your products or services.
• Calculate the break-even point using these inputs.
• Make it a central component of your financial forecasts.

This integration supports strategic pricing, cost management, and informs sales targets.

Key Considerations For Accurate Break Even Calculations

Accuracy in break-even analysis hinges on several factors:

• Thoroughly evaluating all costs , including hidden ones.
• Understanding the industry and market trends to set realistic prices.
• Staying updated with economic changes that can impact costs or prices.

These considerations ensure your break-even analysis stays on point and reliable.

Using Break Even Analysis To Foster Communication And Alignment In Business Teams

Break-even analysis can be a communication tool . Share the findings with your team:

Use simple visuals and clear language to help each team understand its role in reaching the break-even point.

Continual Review And Adjustment: Ensuring Relevance Of The Break Even Analysis Over Time

To stay relevant, break-even analysis requires ongoing review and adjustment:

• Update the analysis with current data.
• Reflect changes in costs, pricing, and market conditions.
• Use it to assess the impact of new strategies or products.

By doing so, your business stays informed and can make proactive adjustments.

Frequently Asked Questions For Exploring Break Even Analysis Business Plan: Strategies For Success

How break-even analysis can be useful in business planning.

Break-even analysis helps businesses determine the sales volume needed to cover costs, ensuring informed pricing, budgeting, and financial planning decisions. It identifies profit thresholds, facilitating strategic planning and risk management .

What Is The Strategy Of Break-even Analysis?

The strategy of break-even analysis involves calculating the point at which revenue equals costs, indicating no net profit or loss. This financial assessment helps businesses determine necessary sales volume to avoid losses and plan for profitability.

Why Break-even Analysis Plays A Very Important Role In Success Of Any Business?

Break-even analysis is crucial as it helps businesses determine when they will cover costs and forecast profitability. It guides pricing strategies and informs decision-making for financial stability and growth.

What Is The Strategic Importance Of A Break-even Analysis?

A break-even analysis determines the sales volume required to cover costs, guiding pricing strategies and financial planning. It highlights profit margins and informs risk assessment, making it vital for business decision-making.

Mastering break-even analysis is crucial to your business plan’s success. Implementing these strategies can transform insights into profit. Remember, understanding costs and pricing is not just smart, it’s essential. Apply this knowledge, fine-tune your approach, and watch your business thrive.

Embrace the power of break-even analysis for a brighter financial future.

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Break-Even Analysis: What It Is and How to Calculate

Priyanka Prakash is a former Fundera.com staff writer and a freelancer specializing in small-business finance, credit, law and insurance, helping business owners navigate complicated concepts and decisions.

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A break-even analysis helps business owners find the point at which their total costs and total revenue are equal, also known as the break-even point in accounting . This lets them know how much product they need to sell to cover the cost of doing business.

At the break-even point, you’ve made no profit, but you also haven’t incurred any losses. This metric is important for new businesses to determine if their ideas are viable, as well as for seasoned businesses to identify operational weaknesses.

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What is the break-even analysis formula?

The break-even analysis formula requires three main pieces of information:

Fixed costs per month: Fixed costs are what your business has to pay no matter how many units you sell. This could include rent, business insurance , business loan payments, accounting and legal services and utilities.

Sales price per unit: This is the amount of money you will charge the customer for every single unit of product or service you sell. Make sure to include any discounts or special offers you give customers. If you sell multiple products or services, figure out the average selling price for everything combined.

Variable costs per unit: These are the costs you incur for each unit you sell. They may include labor, the price of raw materials or sales commissions, and they are subject to change as sales fluctuate. To calculate, multiply the number of units produced by the costs of producing just one unit.

From there, the break-even point can be calculated in units.

Break-even point in units = fixed costs / (sales price per unit – variable costs per unit)

This gives you the number of units you need to sell to cover your costs per month. Anything you sell above this number is profit. Anything below this number means your business is losing money.

Once you’re above the break-even point, every additional unit you sell increases profit by the amount of the unit contribution margin. This is the amount each unit contributes to paying off fixed costs and increasing profits, and it’s the denominator of the break-even analysis formula. To find it, subtract variable costs per unit from sales price per unit.

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Break-even analysis example

Let's say you're thinking about starting a furniture manufacturing business. The first unit you're going to sell is a table. How many tables would you need to sell in order to break even?

If it costs $50 to make a table and you have fixed costs of $1,000, the number of tables you must sell to break even varies depending on price. Here are two scenarios:

If you sell a table at $100: $1,000 / ($100 — $50) = 20 tables

If you sell a table at $200: $1,000 / ($200 — $50) = 6.7 tables

This is a great example of how selling a product for a higher price allows you to reach the break-even point significantly faster. However, you need to think about whether your customers would pay $200 for a table, given what your competitors are charging.

» MORE: NerdWallet’s picks for the best small-business accounting software

When to use break-even analysis

Break-even analysis formulas can help you compare different pricing strategies.

For example, if you raise the price of a product, you’d have to sell fewer items, but it might be harder to attract buyers. You can lower the price, but would then need to sell more of a product to break even. It can also hint at whether it’s worth using less expensive materials to keep the cost down, or taking out a longer-term business loan to decrease monthly fixed costs.

Here are a few specific situations where a break-even analysis is especially useful:

Starting a new business: When starting a business , break-even analysis can help you figure out the viability of your product or service. If you do this analysis along with writing a business plan, you can spot weak points in your company's financial strategy and develop a plan to address them.

Launching a new product or service: Whenever you launch a new product or service, you'll need to determine its sale price and how much it costs to produce it. Using a break-even analysis, you can see how both of these factors affect your profitability. Eventually, you can choose a price that's fair to customers and realistic for your company.

Adding a new sales channel: If your business model changes to incorporate a new sales channel, that's a good opportunity to do a break-even analysis. For example, if you have a brick-and-mortar store but want to start an e-commerce business, your costs and pricing might change. You should make sure you at least break even so that you don't put too much financial strain on your business.

This article originally appeared on Fundera, a subsidiary of NerdWallet.

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Master the Break Even Analysis: The Ultimate Guide

A break-even point tells you exactly how much product you need to sell to become profitable. Learn how to calculate your break-even points, with examples and a free downloadable template in this guide.

If you’re a business owner, or thinking about becoming one, you should know how to do a break-even analysis. It’s a crucial activity for making important business decisions and financial planning .

A break-even analysis will tell you exactly what you need to do in order to make back your initial investment and begin turning a profit.

Table of contents

What is break-even analysis?

Benefits of a break-even analysis, how to calculate break-even point, break-even analysis examples: when to use it, break-even analysis limitations, tips to lower your break-even point, download your free break-even analysis template, break-even analysis faq.

Break-even analysis is a small-business accounting process for determining at what point a company, or a new product or service, will be profitable. It’s a financial calculation used to determine the number of products or services you must sell to at least cover your production costs.

The break-even theory is based on the fact that there is a minimum product level at which a venture neither makes profit nor loss. M.B. Ndaliman, An Economic Model for Break-even Analysis

For example, a break-even analysis could help you determine how many cellphone cases you need to sell to cover your warehousing costs, or how many hours of service you’ll have to bill to pay for your office space. Anything you sell beyond your break-even point will add profit.

To fully understand break-even analysis for your business, you should be aware of your fixed and variable costs.

• Fixed costs: expenses that stay the same no matter how much you sell.
• Variable costs: expenses that fluctuate up and down with production or sales volume.

Learn more: Small Business Accounting 101: How To Set Up and Manage Your Books

Many small and medium-sized businesses never perform any meaningful financial analysis. They don’t know how many units they have to sell to see a return on their capital.

Break-even analysis is a way to find out the minimum sales volume so that a business does not suffer losses. Lis Sintha, Importance of Break-Even

A break-even point analysis is a powerful tool for planning and decision making, and for highlighting critical information like costs, quantities sold, prices, and so much more.

Price smarter

Finding your break-even point will help you understand how to price your products better. A lot of psychology goes into effective pricing, but knowing how it will affect your gross profit margins is just as important. You need to make sure you can pay your bills.

Cover fixed costs

When most people think about pricing, they think about variable cost—that is, how much their product costs to make. But in addition to variable costs, you also need to cover your fixed costs, like insurance or web development fees. Performing a break-even analysis helps you do that.

Catch missing expenses

It’s easy to forget about expenses when you’re thinking through a small business idea. When you do a break-even analysis you have to lay out all your financial commitments to figure out your break-even point. This will limit the number of surprises down the road.

Set sales revenue targets

After completing a break-even analysis, you know exactly how many sales you need to make to be profitable. This will help you set more concrete sales goals for you and your team. When you have a clear number in mind, it will be much easier to follow through.

Make smarter decisions

Entrepreneurs often make business decisions based on emotion. If they feel good about a new venture, they go for it. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to make decisions when you’ve put in the work and have useful data in front of you.

Limit financial strain

Doing a break-even analysis helps mitigate risk by showing you when to avoid a business idea. It will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes.

Fund your business

A break-even analysis is a key component of any business plan . It’s usually a requirement if you want to take on investors or borrow money to fund your business. You have to prove your plan is viable. More than that, if the analysis looks good, you will be more comfortable taking on the burden of financing.

Your break-even point is equal to your fixed costs, divided by your average selling price, minus variable costs. It is the point at which revenue is equal to costs and anything beyond that makes the business profitable.

Formula: break-even point = fixed cost / (average selling price - variable costs)

Before we calculate the break-even point, let’s discuss how the break-even analysis formula works. Understanding the framework of the following formula will help determine profitability and future earnings potential.

Basically, you need to figure out what your net profit per unit sold is and divide your fixed costs by that number. This will tell you how many units you need to sell before you start earning a profit.

As you now know, your product sales need to pay for more than just the costs of producing them. The remaining profit is known as the contribution margin ratio because it contributes sales dollars to the fixed costs.

Now that you know what it is, how it works, and why it matters, let's break down how to calculate your break-even point.

Before we get started, download your free copy of the break-even analysis template . You can make a copy, edit the template, and do your own calculations.

Step 1: Gather your data

The first step is to list all the costs of doing business—everything including the cost of your product, rent, and bank fees. Think through everything you have to pay for and write it down.

The next step is to divide your costs into fixed costs and variable costs.

Fixed costs

Fixed costs are any costs that stay the same, regardless of how much product you sell. This could include things like rent, software subscriptions, insurance, and labor.

Make a list of everything you have to pay for, no matter what. In most cases, you can list total expenses as monthly amounts, unless you’re considering an event with a shorter timeframe, such as a three-day festival. Add everything up. If you’re using the break-even analysis spreadsheet, it will do the math for you automatically.

Variable costs

Variable costs are costs that fluctuate based on the amount of product you sell. This could include things like materials, commissions, payment processing, and labor.

Some costs can go in either category, depending on your business. If you have salaried staff, they will go under fixed costs. But if you pay part-time hourly employees who only work when it's busy, they will be considered variable costs.

Make a list of all your costs that fluctuate depending on how much you sell. List the price per unit sold and add up all the costs.

Average price

Finally, decide on a price. Don’t worry if you’re not ready to commit to a final price yet. You can change this later. Keep in mind, this is the average price. If you offer some customers bulk discounts, it will lower the average price.

Step 2: Plug in your data

Now it’s time to plug in your data. The spreadsheet will pull your fixed cost total and variable cost total up into the break-even calculation. All you need to do is to fill in your average price in the appropriate cell. After that, the math will happen automatically. The number that gets calculated in the top right cell under Break-Even Units is the number of units you need to sell to break even.

In the break-even analysis example above, the break-even point is 92.5 units.

Step 3: Make adjustments

Feel free to experiment with different numbers. See what happens if you lower your fixed or variable costs or try changing the price. You may not get it right the first time, so make adjustments as you go.

Warning: Don’t forget any expenses

The most common pitfall of break-even-point analysis is forgetting things—especially variable costs. Break-even analyses are an important step toward making important business decisions. That’s why you need to make sure your data is as accurate as possible.

To make sure you don’t miss any costs, think through your entire operations from start to finish. If you think through your ecommerce packaging experience, you might remember that you need to order branded tissue paper, and that one order lasts you 200 shipments.

If you’re thinking through your event setup, you might remember that you’ll need to provide napkins along with the food you’re selling. These are variable costs that need to be included.

If you need further help, use a break-even calculator to help you determine your financial analysis.

There are four common scenarios for when it helps to do a break-even analysis.

1. Starting a new business

If you’re thinking about starting a new business , a break-even analysis is a must. Not only will it help you decide if your business idea is viable, it will force you to do research and be realistic about costs, and make you think through your pricing strategy.

2. Creating a new product

If you already have a business, you should still do a break-even analysis before committing to a new product —especially if that product is going to add significant expense. Even if your fixed costs, like an office lease, stay the same, you’ll need to work out the variable costs related to your new product and set prices before you start selling.

3. Adding a new sales channel

Any time you add a new sales channel, your costs will change—even if your prices don’t. For example, if you’ve been selling online and you’re thinking about doing a pop-up shop , you’ll want to make sure you at least break even. Otherwise, the financial strain could put the rest of your business at risk.

This applies equally to adding new online sales channels , like shoppable posts on Instagram . Will you be planning any additional costs to promote the channel, like Instagram ads? Those costs need to be part of your break-even analysis.

4. Changing your business model

If you’re thinking about changing your business model, for example, switching from dropshipping products to carrying inventory, you should do a break-even analysis. Your startup costs could change significantly, and this will help you figure out if your prices need to change too.

Learn more: 7 Ways Small Businesses Can Save Money In Their First Year

Break-even analysis plays an important role in bookkeeping and making business decisions, but it’s limited in the type of information it can provide.

Not a predictor of demand

It’s important to note that a break-even analysis is not a predictor of demand. It won’t tell you what your sales are going to be, or how many people will want what you’re selling. It will only tell you the amount of sales you need to make to operate profitably.

Dependent on reliable data

Sometimes costs fall into both fixed and variable categories. This can make calculations complicated and you’ll likely need to wedge them into one or the other. For example, you may have a baseline labor cost no matter what, as well as an additional labor cost that could fluctuate based on how much product you sell.

The accuracy of your break-even point depends on accurate data. If you don’t feed good data into a break-even formula, you won’t get a reliable result.

Many businesses have multiple products with multiple prices. Unfortunately, the break-even point formula doesn’t reflect this kind of nuance. You’ll likely need to work with one product at a time, or estimate an average price based on all the products you might sell. If this is the case, it’s best to run a few different scenarios to be better prepared.

As prices fluctuate, so do costs. This model assumes that only one thing changes at a time. Instead, if you lower your price and sell more, your variable costs might decrease because you have more buying power or are able to work more efficiently. Ultimately, it’s only an estimate.

Ignores time

The break-even analysis ignores fluctuations over time. Your timeframe will be dependent on the period you use to calculate fixed costs (monthly is most common). Although you’ll see how many units you need to sell over the course of the month, you won’t see how things change if your sales fluctuate week to week, or seasonally over the course of a year. For this, you’ll need to rely on good cash flow management and possibly a solid sales forecast .

In addition, break-even analysis doesn’t take the future into account. If your raw material costs double next year, your break-even point will be a lot higher, unless you raise your prices. If you raise your prices, you could lose customers. This delicate balance is always in flux.

Ignores competitors

As a new entrant to the market, you’re going to affect competitors and vice versa. They could change their prices, which could affect demand for your product, causing you to change your prices too. If they grow quickly and a raw material you both use becomes more scarce, the cost could go up.

Ultimately, a break-even analysis will give you a very solid understanding of the baseline conditions for being successful. It is a must. But it’s not the only research you need to do before starting or making changes to a business.

What if you complete your break-even analysis and find out that the number of units you need to sell seems unrealistic or unattainable? Don’t panic: you may be able to make some adjustments to lower your break-even point.

1. Lower fixed costs

See if there’s an opportunity to lower your fixed costs. The lower you can get them, the fewer units you’ll need to sell in order to break even. For example, if you’re thinking about opening a retail store and numbers aren’t working out, consider selling online instead. How does that affect your fixed costs?

2. Raise your prices

If you raise your prices, you won’t need to sell as many units to break even. The marginal contribution per unit sold will be higher. When thinking about raising your prices, be mindful of what the market is willing to pay and of the expectations that come with a price. You won’t need to sell as many units, but you’ll still need to sell enough—and if you charge more, buyers may expect a better product or better customer service.

3. Lower variable costs

Lowering your variable costs is often the most difficult option, especially if you’re just going into business. But the more you scale, the easier it will be to reduce variable costs. It’s worth trying to lower your costs by negotiating with your suppliers, changing suppliers, or changing your process. For example, maybe you’ll find that packing peanuts are cheaper than bubble wrap for shipping fragile products .

If you haven't already, remember to download your free break-even analysis template .

Doing a break-even analysis is essential for making smart business decisions. The next time you’re thinking about starting a new business, or making changes to your existing business, do a break-even analysis so you’ll be better prepared.

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What is a break-even point (BEP)?

What are the three methods to calculate your break-even point.

• Fixed costs: Expenses your business has to pay regardless of how many units you make or sell.
• Variable costs: Expenses that increase or decrease depending on your level of production or sales volume.
• Average sales price: The amount you will charge customers per unit of your product, averaged to include any bulk discounts you may offer.

What’s a good margin of safety?

What’s the difference between break-even analysis and break-even point.

Break-even point refers to a measure of the margin of safety. A break-even analysis tells you how many sales you must make to cover the total costs of production.

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Break-Even Analysis

What Is Break Even Analysis?

Break even analysis is a calculation of the quantity sold which generates enough revenues to equal expenses. In securities trading, the meaning of break even analysis is the point at which gains are equal to losses.

Another definition of break even analysis is the examination and calculation of the margin of safety that’s based on a company’s revenue – as well as the related costs of running the organization.

How Is Break Even Analysis Used?

A break-even analysis helps business owners determine when they'll begin to turn a profit, which can help them better price their products. Usually, management uses this metric to help guide strategic decisions to grow/maintain the business.

Break-Even Analysis vs. Break-Even Point

Break-even analysis uses a calculation called the break even point (BEP) which provides a dynamic overview of the relationships among revenues, costs, and profits. More specifically, it looks at a company’s fixed costs in relation to profits that are earned from each unit sold.

Break Even Analysis Varies Among Industries

Typical variable and fixed costs differ widely among industries. This is why comparison of break-even points is generally most meaningful among companies within the same industry. The definition of a 'high' or 'low' break-even point should be made within this context.

Break Even Analysis Formula

Fixed Costs

Fixed costs do not change with the quantity of output. In other words, they’re not affected by sales. Examples include rent and insurance premiums, as well as fees paid for marketing or loan payments.

Variable Costs

Variable costs change depending on the amount of output. Examples include raw materials and labor that are directly involved in a company's manufacturing process.

Contribution Margin

The contribution margin is the amount remaining (i.e. the excess) after total variable costs are deducted from a product’s selling price.

Say that an item sells for $5,000 and your total variable costs are $3,000 per unit. Your contribution margin would be $2,000 (after subtracting $3,000 from $5,000). This is the revenue that’ll be used to cover your fixed costs – which isn’t considered when calculating the contribution margin.

Earned Profit

Earned profit is the amount a business earns after taking into account all expenses. You can calculate this number by subtracting the costs that go into your company’s operations from your sales.

Example of Break Even Analysis

In this break even analysis sample, Restaurant ABC only sells pepperoni pizza. Its variable expenses for each pizza include:

Flour: $0.50

Yeast: $0.05

Water: $0.01

Cheese: $3.00

Pepperoni: $2.00

Adding all of these costs together, we determine that it has $5.56 in variable costs per pizza. Based on the total variable expenses per pizza, Restaurant ABC must price its pizzas at $5.56 or higher to cover those costs.

The fixed expenses per month include:

Labor: $1,500

Rent: $3,000

Insurance: $200

Advertising: $500

Utilities: $450

In total, Restaurant ABC's fixed costs are $5,650.

Let’s say that each pizza is sold for $10.00. Therefore the contribution margin is $4.44 ($10.00 - $5.56).

To determine the number of pizzas (or units) Restaurant ABC needs to sell, take its fixed costs and divide them by the contribution margin:

$5,650 ÷ $4.44 = 1,272.5

This means the restaurant needs to sell at least 1,272.53 pizzas (rounded up to 1,273 whole pizzas), to cover its monthly fixed costs. Or, the restaurant needs to have at least $12,730 in sales (1,272.5 x $10) to reach the break-even point.

Note: If your product must be sold as whole units, you should always round up to find the break-even point.

Remember: Fixed Costs Can Increase

Some fixed costs increase after a certain level of revenue is reached. For example, if Restaurant ABC begins selling 5,000 pizzas per month – rather than 2,000 – it might need to hire a second manager, thus increasing labor costs.

Break-Even Analysis Benefits

Break-even analysis is a great way to determine a business’ profitability. It can show business owners and management how many units need to be sold in order to cover both fixed and variable expenses. It also provides a specific benchmark or goal so businesses not only survive but also remain profitable.

Calculating Break Even Analysis in Excel

Excel users can utilize Goal Seek (a tool that’s built into the program) to calculate a break-even rate. To do this, you’ll need to have an Excel break-even calculator set up:

Step 1: Find Goal Seek

Step 2: Enter Your Numbers Into the Break Even Point

In the inputs, enter:

Set Cell = Contribution Margin Per Unit($I$12);

To Value = 0;

By Changing Sells = $B$30 i.e. How many units do you want to sell (see blue arrows).

Step 3: Review the Number of Units Required to Break Even

Excel will automatically populate the required number of units to ensure that Contribution Margin is $0.

Optional: Create A Scenario Simulator for Multiple Units of Sale

If you want to see profitability based on many sales figures, then a scenario simulator may be helpful.

To do this, In Excel, go to: DATA → What-if Scenario → Scenario Manager. Here, you can input multiple scenarios with different sales units.

IA has recreated 3 scenarios as a starting point（Recession = 1000 Units; Normal = 1500 Units; Boom= 2000 Units)

Excel will then ask you to enter how many units you want this scenario to contain. In this instance, it is 3000 units. Click “Ok.”

If you click on a scenario and click “SHOW,” Excel will automatically update the expected sales figure and calculate the contribution margin. In the following screenshot, the chosen Example scenario has 3000 units:

To view all your scenarios simultaneously, click on “Summary.” Excel will ask you which resulting cell you want to see. In order to see “Contribution Margin Per Unit,” our example set that to cell $I$12 and Excel inserted a new tab which shows the scenarios ($B$30 is our units of expected sale) plus the associated Contribution Margin Per Unit ($I1$12).

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How to Do a Business Plan Break Even Analysis for Beginners

By: Author Tony Martins Ajaero

Home » Business Plans

Are you currently writing a business plan and want to do break even analysis? If YES, here’s a beginner’s guide on how to calculate break even point for a business.

Every business is established with the aim of making profits. No entrepreneur wants to go through the stress of establishing and running a business that would not be able to pay its bills after a particular time frame. This is the major reason why it is very pertinent to run a break even analysis whenever one thinks of starting a business.

What is a Break Even Analysis?

Break even analysis is a calculation that will tell you how many units of products you need to sell or how many people you have to offer services to in order to break even in your business. In essence, your break-even point is the sales level that is required for your business to operate without incurring financial loss. To succeed in any business you are doing, it is pertinent to determine this point as the viability of your business is reliant on staying above this number.

For instance, as an entrepreneur selling umbrellas, you need to know how many umbrellas you need to sell to cover your overhead costs. You need to know that anything you sell above your break-even point will mean profit for your business.

A break-even analysis is a key part of any good business plan as it would help you know if your business idea is worth pursuing, and it can remain helpful in the long run as a way to figure out the best pricing structure for your products.

It is a fact that experienced entrepreneurs would not even think of starting a business until they are sure, from their break-even analysis, that their predicted revenue would be greater than their costs, and that they can break even at a certain point that is predictable. Once this point is established, the entrepreneurs can then continue creating their business plans. A break-even analysis is the best way to determine whether your business idea is a winner or a loser.

A company can be said to have achieved break even when its total sales or revenue equals its total expenses. No profit has been made at the break even point, and no losses have been incurred either. It should be noted that any revenue that is made above the breakeven point is pure profit for the business.

4 Times When It is Important to Carry Out Break Even Analysis

• When starting a new business

Like we have already established, whenever you want to start a new business, your first thoughts should go to conducting break even analysis. Not only will it help you decide if your business idea is viable, but it will force you to do research and be realistic about costs, as well as think through your <a class="wpil_keyword_link" Pricing Strategy.

• When you want to create or introduce a new product line

If you already have a running business, you are still required do a break-even analysis before adding a new product line, especially if that product is expected to add significant expenses to your business. Even if your fixed costs, like an office lease, stay the same, you will need to work out the variable costs related to your new product and set prices before you start selling.

• When adding a new sales channel

Any time you add a new sales channel, your costs will change—even if your prices don’t. For example, if you have been selling online and you are now thinking about opening a pop-up shop, you will have to make sure you at least break even so as not to add a strain to your business.

• When changing your <a class="wpil_keyword_link" Business model

If you are thinking about changing your business model, for example, switching from a retail store to eCommerce, you are required to do a break-even analysis. Your costs could change significantly and this will help you figure out if your prices need to change too.

When conducting a break-even analysis, you need to take note of certain variables. The first step basically is to list all your costs of doing business. You need to put down everything, from the cost of your product, to rent, to bank fees and others. Think through everything you have to pay for and write it down.

The next step is to divide them into fixed costs and variable costs.

• Fixed Costs

Fixed costs are any costs that stay the same regardless of how much products you sell. This could include things like rent, software subscriptions, insurance, deposits or contingency funds and labour. You have to make a list of everything you have to pay for no matter what.

In most cases, you can list the expenses as monthly amounts unless you are considering an event with a shorter time frame. If you are starting your business from the scratch, you should never rely on guesswork to estimate your costs. You can check with trade associations for information on average costs in your particular industry.

• Variable Costs

Variable costs are costs that fluctuate based on the amount of products you sell. This could include things like materials, commissions, payment processing, labour, shipping costs of the product, and inventory etc.

Some costs could go in either category, depending on your business. If you have salaried staff, they will go under fixed costs. But if you pay part-time hourly employees who only work when it’s busy, then they will be considered as variable costs.

• Average price per unit

Finally, you need to decide on a price for your product. Don’t worry if you are not ready to fix a final price yet, you can change this later. Keep in mind that this is just the average price. If you offer some customers bulk discounts, it will lower the average price. To determine your price, consider these factors:

• What is your competition selling the same thing for?
• Do you want to be at the low, middle, or high end of the price range?
• What is your cost for the unit, and how much profit do you want to make above that?

You can also use informal focus groups to see what people might be willing to pay for your wares or services.

Importance of the Breakeven Point for Businesses

It is very possible for a business to be turning over a lot of money and still be running at a loss. By determine your breakeven point, you will be able to decide the appropriate price, sales budget to have and it also helps in preparing the business plan. The breakeven point analysis is a very useful parameter for determining the critical profit driver for your business including sales volume, average production costs and average sales price.

The other importance of a breakeven point is that it will help you to be able to:

• Determine the productivity of the current product or service you are into
• Know how far you can sustain declining sales in your business before you will start incurring loses.
• Know how many units of your products that you will need to sell before you will be able to make profits
• Know how reduction of sales volume or price will affect your business
• Know how much of an increase in price or volume of sales you will need to make up for an increase in fixed costs.

Calculating Your Break-Even Point

In order to determine your break even point, you will have to arrange the above figures into a break-even analysis formula. A breakeven analysis formula looks like this:

• Break-even point = fixed costs / (average price per unit – variable costs)

Using the formula above, and using the example of an entrepreneur that retails shoes. Let’s just say his fixed costs are $2,000 a month, and his average sales price is $100. It costs him $40 to buy each shoe, which leaves $60. Divide that into $2,000 (monthly fixed costs) and the entrepreneur must sell 33 shoes a month to break even. Any units he sells above that are profit.

Another example, if you have a business that is selling digital information products online at a rate of $100 (that is, the selling price is equal to $100), and the variable cost is $20 and the fixed cost for a particular period in question is $2,000. To get the breakeven point in number of units, you should divide the fixed cost by the contribution.

To get the contribution or gross profit, you will have to subtract the selling price ($100) by the variable cost ($20) which will give you $80. Therefore dividing the fixed cost ($2,000) by the contribution ($80) will give you a breakeven point of 25 units (2,000 ÷ 80 = 25). What this answer means is that 25 units of the information product must be sold in order to cover the costs of running the business.

What Will Happen to the Breakeven Point If Sales Change?

So, what would be the fate of your breakeven point in the event that sales change? Take for instance, if the economy of the country was in recession, the sales that the business has may drop. If this should happen, then you may stand the risk of not selling enough to meet your breakeven point.

Using the business that is selling digital information products above as an example, you might not sell up to the 25 units that are needed in order to breakeven. In this scenario, you will not be able to pay all your expenses, so what can you do to remedy this situation?

There are two possible solutions to this problem. You can either decide to raise the price of your product or you can find ways to cut your costs, both fixed and variable.

• Analyzing your Outcomes

A break even analysis is not just conducted for fun, the analysis if done well is meant to speak volumes about your intended business. In this wise, it’s important to understand what the result of your break even analysis is telling you. The above analysis has told us that the entrepreneur will break even in business when he sells 33 pairs of shoes in a month. This is great, but the next step is to decide whether this can be done at a particular point in time.

If you don’t think that you can sell 33 pairs of shoes within one month as dictated by your financial situation, patience, personal expectations, location and other variables, then this may not be the right business for you. This is because the business would not be able to produce the cash that would sustain it.

If your break-even point is higher than you expected but you still have hopes for the business, you may consider manipulating certain factors to yield a desirable break-even point. You can consider shopping around for less expensive shoes, reducing the number of, or eliminating employees altogether, working from home and raising your sales price.

If after changing some of these factors your break-even point is still too high, then your business idea may not be attainable. This realization is what makes break-even analyses so important. If you end up scratching your supposed business plan, then know that you have saved yourself a lot of time, effort and money.

Furthermore, you need to understand that a break even analysis cannot accurately predict demand. If you go to the market with the wrong product or the wrong price, it may be tough to ever hit your break-even point.

Drawbacks of Break-Even Analysis

Though conducting breakeven analysis for your business is quite necessary before even writing business plan, it is a fact that this analysis also has its drawbacks or limitations. Some of these drawbacks include;

• It doesn’t take note of future changes

One typically ignores the future when calculating breakeven analysis. Although your analysis would show you how many units of products you need to sell over the course of the month, but you won’t see how things would change if your sales fluctuate week to week.

And it won’t tell you how the fluctuation would affect your break-even point. It also doesn’t take the future into account. Break-even analysis only looks at here and now. If your raw materials cost doubles next year, your break-even point will be a lot of higher unless you raise your prices. If you raise your prices, you could lose customers.

• It cannot predict demand

It’s important to note that a break-even analysis cannot predict market demand. It won’t tell you how much you are going to sell at a particular point in time, or how many people will even want what you are selling. It will only tell you how many units you need to sell in order to break even. Since demand is generally not stable, the number of people willing to buy your product will change if you change your price.

• Too simple for complex businesses

The break-even point formula is quite simplistic. Many businesses have multiple products with multiple prices. It won’t be able to pick up all the variables. You’ll likely need to work with one product at a time or estimate an average price based on all the products you might sell. If this is the case, then it is best to run a few different scenarios to be better prepared.

• It doesn’t give account of competitors

As a new entrant to the market, you are going to have competitors on ground, and they of course would be wary of you. They could lower their prices, which can in turn affect demand for your product, causing you to change your prices too. This can equally affect your break even point.

The most common mistake entrepreneurs make when conducting break-even analysis is forgetting things, especially fixed and variable costs. Forgetting things would make your break-even calculation not to be accurate, and to correctly predict the viability of your business, your break even analysis should be as accurate as possible.

To make sure you don’t miss any costs, think through your entire operation from start to finish. If you think through packing a fragile product to ship it, you might remember that you need to add some protection to the box. If you are thinking through your festival setup, you might remember that you’ll need to provide drinking straws along with the drinks you will be servicing.

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• Accounting Terms
• Break-Even Analysis

How to Conduct a Break-Even Analysis

Break-Even Analysis is a financial calculation used to determine the point at which a business's revenues equal its costs, resulting in neither profit nor loss. This analysis is crucial for pricing strategies, budgeting, and financial planning, as it helps businesses understand the minimum sales volume needed to avoid losses. It's a key tool for assessing the viability of a business model or specific project.

Conducting a Break-Even Analysis

Ever wondered how many sales it takes to start making a profit? That’s where a break-even analysis comes in handy. This process is like a financial GPS, guiding you to the point where your revenues equal your expenses.

To get there, follow these steps:

• Identify Fixed Costs: These are expenses that don’t change much, like rent or insurance.
• Calculate Variable Costs: Costs that fluctuate with production, like materials.
• Determine Your Selling Price: How much will you charge for your product or service?
• Do the Math: Divide your fixed costs by the price minus variable costs per unit. This gives the number of units needed to break even.

Break-Even Analysis in Pricing Strategies

How does break-even analysis fit into setting the right price? Think of it as a balancing act. By understanding your break-even point , you can set prices that cover costs and signal when to adjust.

It’s a tool for:

• Validating Pricing: Ensuring your price covers costs and earns a profit.
• Comparing Scenarios: Experiment with different prices and see how they affect your break-even point.
• Strategic Planning: Align pricing with business goals, whether it’s market penetration or maximizing profit.

Utilizing Break-Even Analysis for Business Decisions

Break-even analysis isn’t just about prices; it’s a decision-making compass.

It helps in:

• Assessing New Ventures: Before diving into new projects, see if the numbers make sense.
• Managing Costs: It highlights the impact of reducing costs or changing production levels.
• Financial Planning: Provides a clear picture for investors and stakeholders about when your business will be profitable.

Frequently Asked Questions

What are the key components of a break-even analysis.

The key components include fixed costs (expenses that remain constant), variable costs (costs that vary with production), and the selling price of goods or services. Combining these factors reveals the number of units you need to sell to cover costs.

How does break-even analysis inform pricing decisions?

Break-even analysis helps set a price that covers costs and achieves profit goals. By adjusting the selling price in the formula, you can see how different pricing strategies impact the break-even point, guiding you toward a price that balances costs, market demand, and profitability.

What are the limitations of break-even analysis?

While useful, break-even analysis has its limits. It assumes constant prices and costs, which may not reflect market realities. It also overlooks external factors like competition and economic changes. So, use it as a guide, but keep an eye on the broader picture too.

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How Do You Write a Break-Even Analysis in a Business Plan?

A break-even analysis is an important part of any business plan as it helps determine the point at which a business will start to generate profits.

By calculating the break-even point , a business owner can determine how much they need to sell to cover their costs and start making a profit. This information is crucial for planning and decision-making, as it helps business owners understand how much revenue they need to generate to sustain their operations.

In this blog post, we will go over the steps for writing a break-even analysis in a business plan and the key considerations to keep in mind when calculating your break-even point.

Step1: Determine Your Fixed Costs

Before you can begin calculating your break-even point, it is important to identify all of your fixed costs.

Fixed costs are expenses that do not vary with changes in the number of products or services sold, such as rent, salaries, and insurance. These costs need to be accounted for in your break-even analysis as they represent a necessary expense for your business to operate.

To determine your fixed costs, you will need to gather all of your financial documents and review them for any expenses that are consistently the same each month or year. Once you have identified all of your fixed costs, you can add them up to determine your total fixed costs.

Step 2: Determine Your Variable Costs

In addition to fixed costs, it is also important to consider your variable costs in your break-even analysis. Variable costs are expenses that vary with the number of products or services sold, such as materials and labor.

To determine your variable costs, you will need to consider the cost of producing each product or providing each service. This will include the cost of materials, labor, and any other direct costs associated with producing your products or services. Once you have determined your variable costs, you can calculate the total cost of producing a specific number of products or providing a certain number of services.

It is important to note that both fixed costs and variable costs are essential to consider when calculating your break-even point, as they both impact your overall profitability. Understanding the balance between your fixed and variable costs can help you make informed decisions about pricing, production, and other aspects of your business.

Step 3: Determine Your Price Point

Once you have identified your fixed and variable costs, the next step in writing a break-even analysis is to determine your price point. Your price point is the amount of money that you will charge for each product or service that you sell. Determining your price point can be a complex process, as it involves considering a variety of factors such as market demand, competition, and your target audience.

To determine your price point, you will need to consider the value that your products or services offer to your customers, as well as the costs associated with producing and delivering them. You will also need to consider any additional expenses such as marketing and sales, as these will also impact your overall profitability.

By carefully considering all of these factors, you can determine a price point that allows you to cover your costs and generate a profit.

Step 4: Calculate The Break-Even Point

The break-even point is the point at which a company’s total revenues are equal to its total costs, including both fixed and variable costs. To calculate the break-even point, you need to know the fixed costs, the variable costs per unit, and the selling price per unit.

Here is the formula for calculating the break-even point:

Break-even point (units) = Fixed costs / (Selling price per unit - Variable costs per unit)

For example, let’s say a company has fixed costs of $10,000, variable costs per unit of $2, and a selling price per unit of $4. The break-even point for this company would be:

Break-even point (units) = $10,000 / ($4 - $2) = $10,000 / $2 = 5'000 units

This means that the company needs to sell 5,000 units to break even. If it sells fewer than 2,000 units, it will have a loss. If it sells more than 2,000 units, it will have a profit.

It’s important to note that the break-even point is a theoretical concept and may not reflect the actual behavior of a company’s costs and revenues in practice. Factors such as changes in demand, pricing, and production levels can all affect a company’s actual performance.

A break-even analysis is an important tool for understanding the financial health of your business and determining the point at which you will start to generate profits. By calculating your break-even point, you can make informed decisions about pricing, production, and other aspects of your business.

By following the steps outlined above, you can easily write a break-even analysis as part of your business plan and use it to guide your decision-making and planning.

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How to Write a Competitive Analysis for Your Business Plan

11 min. read

Updated January 3, 2024

Do you know who your competitors are? If you do, have you taken the time to conduct a thorough competitor analysis?

Knowing your competitors, how they operate, and the necessary benchmarks you need to hit are crucial to positioning your business for success. Investors will also want to see an analysis of the competition in your business plan.

In this guide, we’ll explore the significance of competitive analysis and guide you through the essential steps to conduct and write your own. 

You’ll learn how to identify and evaluate competitors to better understand the opportunities and threats to your business. And you’ll be given a four-step process to describe and visualize how your business fits within the competitive landscape.

• What is a competitive analysis?

A competitive analysis is the process of gathering information about your competitors and using it to identify their strengths and weaknesses. This information can then be used to develop strategies to improve your own business and gain a competitive advantage.

• How to conduct a competitive analysis

Before you start writing about the competition, you need to conduct your analysis. Here are the steps you need to take:

1. Identify your competitors

The first step in conducting a comprehensive competitive analysis is to identify your competitors. 

Start by creating a list of both direct and indirect competitors within your industry or market segment. Direct competitors offer similar products or services, while indirect competitors solve the same problems your company does, but with different products or services.

Keep in mind that this list may change over time. It’s crucial to revisit it regularly to keep track of any new entrants or changes to your current competitors. For instance, a new competitor may enter the market, or an existing competitor may change their product offerings.

2. Analyze the market

Once you’ve identified your competitors, you need to study the overall market. 

This includes the market size , growth rate, trends, and customer preferences. Be sure that you understand the key drivers of demand, demographic and psychographic profiles of your target audience , and any potential market gaps or opportunities.

Conducting a market analysis can require a significant amount of research and data collection. Luckily, if you’re writing a business plan you’ll follow this process to complete the market analysis section . So, doing this research has value for multiple parts of your plan.

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3. Create a competitive framework

You’ll need to establish criteria for comparing your business with competitors. You want the metrics and information you choose to provide answers to specific questions. (“Do we have the same customers?” “What features are offered?” “How many customers are being served?”)

Here are some common factors to consider including: 

• Market share
• Product/service offerings or features
• Distribution channels
• Target markets
• Marketing strategies
• Customer service

4. Research your competitors

You can now begin gathering information about your competitors. Because you spent the time to explore the market and set up a comparison framework—your research will be far more focused and easier to complete.

There’s no perfect research process, so start by exploring sources such as competitor websites, social media, customer reviews, industry reports, press releases, and public financial statements. You may also want to conduct primary research by interviewing customers, suppliers, or industry experts.

You can check out our full guide on conducting market research for more specific steps.

5. Assess their strengths and weaknesses

Evaluate each competitor based on the criteria you’ve established in the competitive framework. Identify their key strengths (competitive advantages) and weaknesses (areas where they underperform).

6. Identify opportunities and threats

Based on the strengths and weaknesses of your competitors, identify opportunities (areas where you can outperform them) and threats (areas where they may outperform you) for your business. 

You can check out our full guide to conducting a SWOT analysis for more specific questions that you should ask as part of each step. 

• How to write your competitive analysis

Once you’ve done your research, it’s time to present your findings in your business plan. Here are the steps you need to take:

1. Determine who your audience is

Who you are writing a business plan for (investors, partners, employees, etc.) may require you to format your competitive analysis differently. 

For an internal business plan you’ll use with your team, the competition section should help them better understand the competition. You and your team will use it to look at comparative strengths and weaknesses to help you develop strategies to gain a competitive advantage.

For fundraising, your plan will be shared with potential investors or as part of a bank loan. In this case, you’re describing the competition to reassure your target reader. You are showing awareness and a firm understanding of the competition, and are positioned to take advantage of opportunities while avoiding the pitfalls.

2. Describe your competitive position

You need to know how your business stacks up, based on the values it offers to your chosen target market. To run this comparison, you’ll be using the same criteria from the competitive framework you completed earlier. You need to identify your competitive advantages and weaknesses, and any areas where you can improve.

The goal is positioning (setting your business up against the background of other offerings), and making that position clear to the target market. Here are a few questions to ask yourself in order to define your competitive position:

• How are you going to take advantage of your distinctive differences, in your customers’ eyes? 
• What are you doing better? 
• How do you work toward strengths and away from weaknesses?
• What do you want the world to think and say about you and how you compare to others?

3. Visualize your competitive position

There are a few different ways to present your competitive framework in your business plan. The first is a “positioning map” and the second is a “competitive matrix”. Depending on your needs, you can use one or both of these to communicate the information that you gathered during your competitive analysis:

Positioning map

The positioning map plots two product or business benefits across a horizontal and vertical axis. The furthest points of each represent opposite extremes (Hot and cold for example) that intersect in the middle. With this simple chart, you can drop your own business and the competition into the zone that best represents the combination of both factors.

I often refer to marketing expert Philip Kohler’s simple strategic positioning map of breakfast, shown here. You can easily draw your own map with any two factors of competition to see how a market stacks up.

It’s quite common to see the price on one axis and some important qualitative factor on the other, with the assumption that there should be a rough relationship between price and quality.

Competitive matrix

It’s pretty common for most business plans to also include a competitive matrix. It shows how different competitors stack up according to the factors identified in your competitive framework. 

How do you stack up against the others? Here’s what a typical competitive matrix looks like:

For the record, I’ve seen dozens of competitive matrices in plans and pitches. I’ve never seen a single one that didn’t show that this company does more of what the market wants than all others. So maybe that tells you something about credibility and how to increase it. Still, the ones I see are all in the context of seeking investment, so maybe that’s the nature of the game.

4. Explain your strategies for gaining a competitive edge

Your business plan should also explain the strategies your business will use to capitalize on the opportunities you’ve identified while mitigating any threats from competition. This may involve improving your product/service offerings, targeting underserved market segments, offering more attractive price points, focusing on better customer service, or developing innovative marketing strategies.

While you should cover these strategies in the competition section, this information should be expanded on further in other areas of your business plan. 

For example, based on your competitive analysis you show that most competitors have the same feature set. As part of your strategy, you see a few obvious ways to better serve your target market with additional product features. This information should be referenced within your products and services section to back up your problem and solution statement. 

• Why competition is a good thing

Business owners often wish that they had no competition. They think that with no competition, the entire market for their product or service will be theirs. That is simply not the case—especially for new startups that have truly innovative products and services. Here’s why:

Competition validates your idea

You know you have a good idea when other people are coming up with similar products or services. Competition validates the market and the fact that there are most likely customers for your new product. This also means that the costs of marketing and educating your market go down (see my next point).

Competition helps educate your target market

Being first-to-market can be a huge advantage. It also means that you will have to spend way more than the next player to educate customers about your new widget, your new solution to a problem, and your new approach to services. 

This is especially true for businesses that are extremely innovative. These first-to-market businesses will be facing customers that didn’t know that there was a solution to their problem . These potential customers might not even know that they have a problem that can be solved in a better way. 

If you’re a first-to-market company, you will have an uphill battle to educate consumers—an often expensive and time-consuming process. The 2nd-to-market will enjoy all the benefits of an educated marketplace without the large marketing expense.

Competition pushes you

Businesses that have little or no competition become stagnant. Customers have few alternatives to choose from, so there is no incentive to innovate. Constant competition ensures that your marketplace continues to evolve and that your product offering continues to evolve with it.

Competition forces focus & differentiation

Without competition, it’s easy to lose focus on your core business and your core customers and start expanding into areas that don’t serve your best customers. Competition forces you and your business to figure out how to be different than your competition while focusing on your customers. In the long term, competition will help you build a better business.

• What if there is no competition?

One mistake many new businesses make is thinking that just because nobody else is doing exactly what they’re doing, their business is a sure thing. If you’re struggling to find competitors, ask yourself these questions.

Is there a good reason why no one else is doing it?

The smart thing to do is ask yourself,  “Why isn’t anyone else doing it?”

It’s possible that nobody’s selling cod-liver frozen yogurt in your area because there’s simply no market for it. Ask around, talk to people, and do your market research. If you determine that you’ve got customers out there, you’re in good shape.

But that still doesn’t mean there’s no competition.

How are customers getting their needs met?

There may not be another cod-liver frozen yogurt shop within 500 miles. But maybe an online distributor sells cod-liver oil to do-it-yourselfers who make their own fro-yo at home. Or maybe your potential customers are eating frozen salmon pops right now. 

Are there any businesses that are indirect competitors?

Don’t think of competition as only other businesses that do exactly what you do. Think about what currently exists on the market that your product would displace.

It’s the difference between direct competition and indirect competition. When Henry Ford started successfully mass-producing automobiles in the U.S., he didn’t have other automakers to compete with. His competition was horse-and-buggy makers, bicycles, and railroads.

Do a competitive analysis, but don’t let it derail your planning

While it’s important that you know the competition, don’t get too caught up in the research. 

If all you do is track your competition and do endless competitive analyses, you won’t be able to come up with original ideas. You will end up looking and acting just like your competition. Instead, make a habit of NOT visiting your competition’s website, NOT going into their store, and NOT calling their sales office. 

Focus instead on how you can provide the best service possible and spend your time talking to your customers. Figure out how you can better serve the next person that walks in the door so that they become a lifetime customer, a reference, or a referral source.

If you focus too much on the competition, you will become a copycat. When that happens, it won’t matter to a customer if they walk into your store or the competition’s because you will both be the same.

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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The 7 Best Business Plan Examples (2024)

As an aspiring entrepreneur gearing up to start your own business , you likely know the importance of drafting a business plan. However, you might not be entirely sure where to begin or what specific details to include. That’s where examining business plan examples can be beneficial. Sample business plans serve as real-world templates to help you craft your own plan with confidence. They also provide insight into the key sections that make up a business plan, as well as demonstrate how to structure and present your ideas effectively.

Example business plan

To understand how to write a business plan, let’s study an example structured using a seven-part template. Here’s a quick overview of those parts:

• Executive summary: A quick overview of your business and the contents of your business plan.
• Company description: More info about your company, its goals and mission, and why you started it in the first place.
• Market analysis: Research about the market and industry your business will operate in, including a competitive analysis about the companies you’ll be up against.
• Products and services: A detailed description of what you’ll be selling to your customers.
• Marketing plan: A strategic outline of how you plan to market and promote your business before, during, and after your company launches into the market.
• Logistics and operations plan: An explanation of the systems, processes, and tools that are needed to run your business in the background.
• Financial plan: A map of your short-term (and even long-term) financial goals and the costs to run the business. If you’re looking for funding, this is the place to discuss your request and needs.

7 business plan examples (section by section)

In this section, you’ll find hypothetical and real-world examples of each aspect of a business plan to show you how the whole thing comes together. 

• Executive summary

Your executive summary offers a high-level overview of the rest of your business plan. You’ll want to include a brief description of your company, market research, competitor analysis, and financial information. 

In this free business plan template, the executive summary is three paragraphs and occupies nearly half the page:

• Company description

You might go more in-depth with your company description and include the following sections:

• Nature of the business. Mention the general category of business you fall under. Are you a manufacturer, wholesaler, or retailer of your products?
• Background information. Talk about your past experiences and skills, and how you’ve combined them to fill in the market. 
• Business structure. This section outlines how you registered your company —as a corporation, sole proprietorship, LLC, or other business type.
• Industry. Which business sector do you operate in? The answer might be technology, merchandising, or another industry.
• Team. Whether you’re the sole full-time employee of your business or you have contractors to support your daily workflow, this is your chance to put them under the spotlight.

You can also repurpose your company description elsewhere, like on your About page, Instagram page, or other properties that ask for a boilerplate description of your business. Hair extensions brand Luxy Hair has a blurb on it’s About page that could easily be repurposed as a company description for its business plan. 

• Market analysis

Market analysis comprises research on product supply and demand, your target market, the competitive landscape, and industry trends. You might do a SWOT analysis to learn where you stand and identify market gaps that you could exploit to establish your footing. Here’s an example of a SWOT analysis for a hypothetical ecommerce business: 

You’ll also want to run a competitive analysis as part of the market analysis component of your business plan. This will show you who you’re up against and give you ideas on how to gain an edge over the competition. 

• Products and services

This part of your business plan describes your product or service, how it will be priced, and the ways it will compete against similar offerings in the market. Don’t go into too much detail here—a few lines are enough to introduce your item to the reader.

• Marketing plan

Potential investors will want to know how you’ll get the word out about your business. So it’s essential to build a marketing plan that highlights the promotion and customer acquisition strategies you’re planning to adopt. 

Most marketing plans focus on the four Ps: product, price, place, and promotion. However, it’s easier when you break it down by the different marketing channels . Mention how you intend to promote your business using blogs, email, social media, and word-of-mouth marketing. 

Here’s an example of a hypothetical marketing plan for a real estate website:

Logistics and operations

This section of your business plan provides information about your production, facilities, equipment, shipping and fulfillment, and inventory.

Financial plan

The financial plan (a.k.a. financial statement) offers a breakdown of your sales, revenue, expenses, profit, and other financial metrics. You’ll want to include all the numbers and concrete data to project your current and projected financial state.

In this business plan example, the financial statement for ecommerce brand Nature’s Candy includes forecasted revenue, expenses, and net profit in graphs.

It then goes deeper into the financials, citing:

• Funding needs
• Project cash-flow statement
• Project profit-and-loss statement
• Projected balance sheet

You can use Shopify’s financial plan template to create your own income statement, cash-flow statement, and balance sheet. 

Types of business plans (and what to write for each)

A one-page business plan is a pared down version of a standard business plan that’s easy for potential investors and partners to understand. You’ll want to include all of these sections, but make sure they’re abbreviated and summarized:

• Logistics and operations plan
• Financials 

A startup business plan is meant to secure outside funding for a new business. Typically, there’s a big focus on the financials, as well as other sections that help determine the viability of your business idea—market analysis, for example. Shopify has a great business plan template for startups that include all the below points:

• Market research: in depth
• Financials: in depth

Your internal business plan acts as the enforcer of your company’s vision. It reminds your team of the long-term objective and keeps them strategically aligned toward the same goal. Be sure to include:

• Market research

Feasibility 

A feasibility business plan is essentially a feasibility study that helps you evaluate whether your product or idea is worthy of a full business plan. Include the following sections:

A strategic (or growth) business plan lays out your long-term vision and goals. This means your predictions stretch further into the future, and you aim for greater growth and revenue. While crafting this document, you use all the parts of a usual business plan but add more to each one:

• Products and services: for launch and expansion
• Market analysis: detailed analysis
• Marketing plan: detailed strategy
• Logistics and operations plan: detailed plan
• Financials: detailed projections

Free business plan templates

Now that you’re familiar with what’s included and how to format a business plan, let’s go over a few templates you can fill out or draw inspiration from.

Bplans’ free business plan template

Bplans’ free business plan template focuses a lot on the financial side of running a business. It has many pages just for your financial plan and statements. Once you fill it out, you’ll see exactly where your business stands financially and what you need to do to keep it on track or make it better.

PandaDoc’s free business plan template

PandaDoc’s free business plan template is detailed and guides you through every section, so you don’t have to figure everything out on your own. Filling it out, you’ll grasp the ins and outs of your business and how each part fits together. It’s also handy because it connects to PandaDoc’s e-signature for easy signing, ideal for businesses with partners or a board.

Miro’s Business Model Canvas Template

Miro’s Business Model Canvas Template helps you map out the essentials of your business, like partnerships, core activities, and what makes you different. It’s a collaborative tool for you and your team to learn how everything in your business is linked.

Better business planning equals better business outcomes

Building a business plan is key to establishing a clear direction and strategy for your venture. With a solid plan in hand, you’ll know what steps to take for achieving each of your business goals. Kickstart your business planning and set yourself up for success with a defined roadmap—utilizing the sample business plans above to inform your approach.

Business plan FAQ

What are the 3 main points of a business plan.

• Concept. Explain what your business does and the main idea behind it. This is where you tell people what you plan to achieve with your business.
• Contents. Explain what you’re selling or offering. Point out who you’re selling to and who else is selling something similar. This part concerns your products or services, who will buy them, and who you’re up against.
• Cash flow. Explain how money will move in and out of your business. Discuss the money you need to start and keep the business going, the costs of running your business, and how much money you expect to make.

How do I write a simple business plan?

To create a simple business plan, start with an executive summary that details your business vision and objectives. Follow this with a concise description of your company’s structure, your market analysis, and information about your products or services. Conclude your plan with financial projections that outline your expected revenue, expenses, and profitability.

What is the best format to write a business plan?

The optimal format for a business plan arranges your plan in a clear and structured way, helping potential investors get a quick grasp of what your business is about and what you aim to achieve. Always start with a summary of your plan and finish with the financial details or any extra information at the end.

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Business plans might seem like an old-school stiff-collared practice, but they deserve a place in the startup realm, too. It’s probably not going to be the frame-worthy document you hang in the office—yet, it may one day be deserving of the privilege.

Whether you’re looking to win the heart of an angel investor or convince a bank to lend you money, you’ll need a business plan. And not just any ol’ notes and scribble on the back of a pizza box or napkin—you’ll need a professional, standardized report.

Bah. Sounds like homework, right?

Yes. Yes, it does.

However, just like bookkeeping, loan applications, and 404 redirects, business plans are an essential step in cementing your business foundation.

Don’t worry. We’ll show you how to write a business plan without boring you to tears. We’ve jam-packed this article with all the business plan examples, templates, and tips you need to take your non-existent proposal from concept to completion.

Table of Contents

What Is a Business Plan?

Tips to Make Your Small Business Plan Ironclad

How to Write a Business Plan in 6 Steps

Startup Business Plan Template

Business Plan Examples

Work on Making Your Business Plan

How to Write a Business Plan FAQs

What is a business plan why do you desperately need one.

A business plan is a roadmap that outlines:

• Who your business is, what it does, and who it serves
• Where your business is now
• Where you want it to go
• How you’re going to make it happen
• What might stop you from taking your business from Point A to Point B
• How you’ll overcome the predicted obstacles

While it’s not required when starting a business, having a business plan is helpful for a few reasons:

• Secure a Bank Loan: Before approving you for a business loan, banks will want to see that your business is legitimate and can repay the loan. They want to know how you’re going to use the loan and how you’ll make monthly payments on your debt. Lenders want to see a sound business strategy that doesn’t end in loan default.
• Win Over Investors: Like lenders, investors want to know they’re going to make a return on their investment. They need to see your business plan to have the confidence to hand you money.
• Stay Focused: It’s easy to get lost chasing the next big thing. Your business plan keeps you on track and focused on the big picture. Your business plan can prevent you from wasting time and resources on something that isn’t aligned with your business goals.

Beyond the reasoning, let’s look at what the data says:

• Simply writing a business plan can boost your average annual growth by 30%
• Entrepreneurs who create a formal business plan are 16% more likely to succeed than those who don’t
• A study looking at 65 fast-growth companies found that 71% had small business plans
• The process and output of creating a business plan have shown to improve business performance

Convinced yet? If those numbers and reasons don’t have you scrambling for pen and paper, who knows what will.

Don’t Skip: Business Startup Costs Checklist

Before we get into the nitty-gritty steps of how to write a business plan, let’s look at some high-level tips to get you started in the right direction:

Be Professional and Legit

You might be tempted to get cutesy or revolutionary with your business plan—resist the urge. While you should let your brand and creativity shine with everything you produce, business plans fall more into the realm of professional documents.

Think of your business plan the same way as your terms and conditions, employee contracts, or financial statements. You want your plan to be as uniform as possible so investors, lenders, partners, and prospective employees can find the information they need to make important decisions.

If you want to create a fun summary business plan for internal consumption, then, by all means, go right ahead. However, for the purpose of writing this external-facing document, keep it legit.

Know Your Audience

Your official business plan document is for lenders, investors, partners, and big-time prospective employees. Keep these names and faces in your mind as you draft your plan.

Think about what they might be interested in seeing, what questions they’ll ask, and what might convince (or scare) them. Cut the jargon and tailor your language so these individuals can understand.

Remember, these are busy people. They’re likely looking at hundreds of applicants and startup investments every month. Keep your business plan succinct and to the point. Include the most pertinent information and omit the sections that won’t impact their decision-making.

Invest Time Researching

You might not have answers to all the sections you should include in your business plan. Don’t skip over these!

Your audience will want:

• Detailed information about your customers
• Numbers and solid math to back up your financial claims and estimates
• Deep insights about your competitors and potential threats
• Data to support market opportunities and strategy

Your answers can’t be hypothetical or opinionated. You need research to back up your claims. If you don’t have that data yet, then invest time and money in collecting it. That information isn’t just critical for your business plan—it’s essential for owning, operating, and growing your company.

Stay Realistic

Your business may be ambitious, but reign in the enthusiasm just a teeny-tiny bit. The last thing you want to do is have an angel investor call BS and say “I’m out” before even giving you a chance.

The folks looking at your business and evaluating your plan have been around the block—they know a thing or two about fact and fiction. Your plan should be a blueprint for success. It should be the step-by-step roadmap for how you’re going from Point A to Point B.

How to Write a Business Plan—6 Essential Elements

Not every business plan looks the same, but most share a few common elements. Here’s what they typically include:

• Executive Summary
• Business Overview
• Products and Services
• Market Analysis
• Competitive Analysis
• Financial Strategy

Below, we’ll break down each of these sections in more detail.

1. Executive Summary

While your executive summary is the first page of your business plan, it’s the section you’ll write last. That’s because it summarizes your entire business plan into a succinct one-pager.

Begin with an executive summary that introduces the reader to your business and gives them an overview of what’s inside the business plan.

Your executive summary highlights key points of your plan. Consider this your elevator pitch. You want to put all your juiciest strengths and opportunities strategically in this section.

2. Business Overview

In this section, you can dive deeper into the elements of your business, including answering:

• What’s your business structure? Sole proprietorship, LLC, corporation, etc.
• Where is it located?
• Who owns the business? Does it have employees?
• What problem does it solve, and how?
• What’s your mission statement? Your mission statement briefly describes why you are in business. To write a proper mission statement, brainstorm your business’s core values and who you serve.

Don’t overlook your mission statement. This powerful sentence or paragraph could be the inspiration that drives an investor to take an interest in your business. Here are a few examples of powerful mission statements that just might give you the goosebumps:

• Patagonia: Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.
• Tesla: To accelerate the world’s transition to sustainable energy.
• InvisionApp : Question Assumptions. Think Deeply. Iterate as a Lifestyle. Details, Details. Design is Everywhere. Integrity.
• TED : Spread ideas.
• Warby Parker : To offer designer eyewear at a revolutionary price while leading the way for socially conscious businesses.

3. Products and Services

As the owner, you know your business and the industry inside and out. However, whoever’s reading your document might not. You’re going to need to break down your products and services in minute detail.

For example, if you own a SaaS business, you’re going to need to explain how this business model works and what you’re selling.

You’ll need to include:

• What services you sell: Describe the services you provide and how these will help your target audience.
• What products you sell: Describe your products (and types if applicable) and how they will solve a need for your target and provide value.
• How much you charge: If you’re selling services, will you charge hourly, per project, retainer, or a mixture of all of these? If you’re selling products, what are the price ranges?

4. Market Analysis

Your market analysis essentially explains how your products and services address customer concerns and pain points. This section will include research and data on the state and direction of your industry and target market.

This research should reveal lucrative opportunities and how your business is uniquely positioned to seize the advantage. You’ll also want to touch on your marketing strategy and how it will (or does) work for your audience.

Include a detailed analysis of your target customers. This describes the people you serve and sell your product to. Be careful not to go too broad here—you don’t want to fall into the common entrepreneurial trap of trying to sell to everyone and thereby not differentiating yourself enough to survive the competition.

The market analysis section will include your unique value proposition. Your unique value proposition (UVP) is the thing that makes you stand out from your competitors. This is your key to success.

If you don’t have a UVP, you don’t have a way to take on competitors who are already in this space. Here’s an example of an ecommerce internet business plan outlining their competitive edge:

FireStarters’ competitive advantage is offering product lines that make a statement but won’t leave you broke. The major brands are expensive and not distinctive enough to satisfy the changing taste of our target customers. FireStarters offers products that are just ahead of the curve and so affordable that our customers will return to the website often to check out what’s new.

5. Competitive Analysis

Your competitive analysis examines the strengths and weaknesses of competing businesses in your market or industry. This will include direct and indirect competitors. It can also include threats and opportunities, like economic concerns or legal restraints.

The best way to sum up this section is with a classic SWOT analysis. This will explain your company’s position in relation to your competitors.

6. Financial Strategy

Your financial strategy will sum up your revenue, expenses, profit (or loss), and financial plan for the future. It’ll explain how you make money, where your cash flow goes, and how you’ll become profitable or stay profitable.

This is one of the most important sections for lenders and investors. Have you ever watched Shark Tank? They always ask about the company’s financial situation. How has it performed in the past? What’s the ongoing outlook moving forward? How does the business plan to make it happen?

Answer all of these questions in your financial strategy so that your audience doesn’t have to ask. Go ahead and include forecasts and graphs in your plan, too:

• Balance sheet: This includes your assets, liabilities, and equity.
• Profit & Loss (P&L) statement: This details your income and expenses over a given period.
• Cash flow statement: Similar to the P&L, this one will show all cash flowing into and out of the business each month.

It takes cash to change the world—lenders and investors get it. If you’re short on funding, explain how much money you’ll need and how you’ll use the capital. Where are you looking for financing? Are you looking to take out a business loan, or would you rather trade equity for capital instead?

Read More: 16 Financial Concepts Every Entrepreneur Needs to Know

Startup Business Plan Template (Copy/Paste Outline)

Ready to write your own business plan? Copy/paste the startup business plan template below and fill in the blanks.

Executive Summary Remember, do this last. Summarize who you are and your business plan in one page.

Business Overview Describe your business. What’s it do? Who owns it? How’s it structured? What’s the mission statement?

Products and Services Detail the products and services you offer. How do they work? What do you charge?

Market Analysis Write about the state of the market and opportunities. Use date. Describe your customers. Include your UVP.

Competitive Analysis Outline the competitors in your market and industry. Include threats and opportunities. Add a SWOT analysis of your business.

Financial Strategy Sum up your revenue, expenses, profit (or loss), and financial plan for the future. If you’re applying for a loan, include how you’ll use the funding to progress the business.

5 Frame-Worthy Business Plan Examples

Want to explore other templates and examples? We got you covered. Check out these 5 business plan examples you can use as inspiration when writing your plan:

• SBA Wooden Grain Toy Company
• SBA We Can Do It Consulting
• OrcaSmart Business Plan Sample
• Plum Business Plan Template
• PandaDoc Free Business Plan Templates

Get to Work on Making Your Business Plan

If you find you’re getting stuck on perfecting your document, opt for a simple one-page business plan —and then get to work. You can always polish up your official plan later as you learn more about your business and the industry.

Remember, business plans are not a requirement for starting a business—they’re only truly essential if a bank or investor is asking for it.

Ask others to review your business plan. Get feedback from other startups and successful business owners. They’ll likely be able to see holes in your planning or undetected opportunities—just make sure these individuals aren’t your competitors (or potential competitors).

Your business plan isn’t a one-and-done report—it’s a living, breathing document. You’ll make changes to it as you grow and evolve. When the market or your customers change, your plan will need to change to adapt.

That means when you’re finished with this exercise, it’s not time to print your plan out and stuff it in a file cabinet somewhere. No, it should sit on your desk as a day-to-day reference. Use it (and update it) as you make decisions about your product, customers, and financial plan.

Review your business plan frequently, update it routinely, and follow the path you’ve developed to the future you’re building.

Keep Learning: New Product Development Process in 8 Easy Steps

What financial information should be included in a business plan?

Be as detailed as you can without assuming too much. For example, include your expected revenue, expenses, profit, and growth for the future.

What are some common mistakes to avoid when writing a business plan?

The most common mistake is turning your business plan into a textbook. A business plan is an internal guide and an external pitching tool. Cut the fat and only include the most relevant information to start and run your business.

Who should review my business plan before I submit it?

Co-founders, investors, or a board of advisors. Otherwise, reach out to a trusted mentor, your local chamber of commerce, or someone you know that runs a business.

Ready to Write Your Business Plan?

Don’t let creating a business plan hold you back from starting your business. Writing documents might not be your thing—that doesn’t mean your business is a bad idea.

Let us help you get started.

Join our free training to learn how to start an online side hustle in 30 days or less. We’ll provide you with a proven roadmap for how to find, validate, and pursue a profitable business idea (even if you have zero entrepreneurial experience).

Stuck on the ideas part? No problem. When you attend the masterclass, we’ll send you a free ebook with 100 of the hottest side hustle trends right now. It’s chock full of brilliant business ideas to get you up and running in the right direction.

About Jesse Sumrak

Jesse Sumrak is a writing zealot focused on creating killer content. He’s spent almost a decade writing about startup, marketing, and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped business. A writer by day and a peak bagger by night (and early early morning), you can usually find Jesse preparing for the apocalypse on a precipitous peak somewhere in the Rocky Mountains of Colorado.

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• Business plans

Develop your business plan

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Why you need a business plan

Use our business plan tool, download a detailed business plan template, tips to help you write your business plan.

Whether you've just started out or have been running your business for years, business planning can be the key to your success. Having a business plan:

• helps you to prioritise – it gives your business direction, defines your objectives, maps out how you'll achieve your goals and helps you to manage possible bumps in the road
• gives you control over your business – the planning process helps you learn about the different things that could affect your success. If you're already in business, it helps you to step back and look at what's working and what you can improve on
• helps you seek finance – if you're seeking finance for your business, you'll need to show banks and investors why they should invest in your business.

It will help you to develop a shorter business plan to:

• evaluate a new business idea
• set some goals for the year ahead
• keep your business on track.

Use this template if you are seeking finance for your business or want to include more detail in your business plan.

Business plan template

1. Determine what your plan is for

Does your business plan have more than one purpose? Will you use it internally, or will you share it externally, for example with potential investors or banks?

Deciding what the purpose is, can help you develop your plan for the right audience. If the plan has been developed for third parties, you will need to determine what they’ll be most interested in.

2. Prepare your finances

Use our detailed business plan template if you are seeking finance.

Lenders and investors will want to know if your finances are in order and your business is in a strong financial position. They'll want to know how much money you currently have, how much money you need and how much you expect to make in the near future. While a bit of extra funding will help you ensure you’re covered for unexpected costs, be realistic and avoid asking for more than you need.

If you're starting out and don't have financial information yet, our template provides resources to help you get your finances ready.

3. Write your summary last

Summarise the main points of your business plan using as few words as possible. You want to get to the point but not overlook important facts. This is your opportunity to sell yourself, but don't overdo it. The summary should include details about your business, market, goals and what makes you different from other businesses.

4. Get help

Don't leave your business plan to the last minute. It takes time, research and careful preparation to develop an effective business plan.

If you aren't confident in completing the plan yourself, consider getting a professional to look over it and provide advice.

There are a number of government services available to help you plan, start or grow your business. These services can provide general advice, workshops, seminars and networking events, and can even match you with a mentor or business coach.

Get expert help from a business adviser in your area .

5. Review your plan regularly

As your business changes, your plan will need to change to ensure your business is still heading in the right direction. Having your plan up-to-date can keep you focused on where you are heading.

It's a good idea to keep a record of each version of your business plan.

6. Protect your plan

Having an understanding with third parties when distributing a plan could be enough protection for some businesses. But if you have innovative business practices, products or services, you may want people to sign a confidentiality agreement to protect your innovations.

It may also be a good idea to include some words in your plan asking the reader not to disclose the details of your plan.

Start writing and developing your marketing strategy.

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How To Start A Business In 11 Steps (2024 Guide)

Updated: Apr 7, 2024, 1:44pm

Table of Contents

Before you begin: get in the right mindset, 1. determine your business concept, 2. research your competitors and market, 3. create your business plan, 4. choose your business structure, 5. register your business and get licenses, 6. get your finances in order, 7. fund your business, 8. apply for business insurance, 9. get the right business tools, 10. market your business, 11. scale your business, what are the best states to start a business, bottom line, frequently asked questions (faqs).

Starting a business is one of the most exciting and rewarding experiences you can have. But where do you begin? There are several ways to approach creating a business, along with many important considerations. To help take the guesswork out of the process and improve your chances of success, follow our comprehensive guide on how to start a business. We’ll walk you through each step of the process, from defining your business idea to registering, launching and growing your business .

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The public often hears about overnight successes because they make for a great headline. However, it’s rarely that simple—they don’t see the years of dreaming, building and positioning before a big public launch. For this reason, remember to focus on your business journey and don’t measure your success against someone else’s.

Consistency Is Key

New business owners tend to feed off their motivation initially but get frustrated when that motivation wanes. This is why it’s essential to create habits and follow routines that power you through when motivation goes away.

Take the Next Step

Some business owners dive in headfirst without looking and make things up as they go along. Then, there are business owners who stay stuck in analysis paralysis and never start. Perhaps you’re a mixture of the two—and that’s right where you need to be. The best way to accomplish any business or personal goal is to write out every possible step it takes to achieve the goal. Then, order those steps by what needs to happen first. Some steps may take minutes while others take a long time. The point is to always take the next step.

Most business advice tells you to monetize what you love, but it misses two other very important elements: it needs to be profitable and something you’re good at. For example, you may love music, but how viable is your business idea if you’re not a great singer or songwriter? Maybe you love making soap and want to open a soap shop in your small town that already has three close by—it won’t be easy to corner the market when you’re creating the same product as other nearby stores.

If you don’t have a firm idea of what your business will entail, ask yourself the following questions:

• What do you love to do?
• What do you hate to do?
• Can you think of something that would make those things easier?
• What are you good at?
• What do others come to you for advice about?
• If you were given ten minutes to give a five-minute speech on any topic, what would it be?
• What’s something you’ve always wanted to do, but lacked resources for?

These questions can lead you to an idea for your business. If you already have an idea, they might help you expand it. Once you have your idea, measure it against whether you’re good at it and if it’s profitable.

Your business idea also doesn’t have to be the next Scrub Daddy or Squatty Potty. Instead, you can take an existing product and improve upon it. You can also sell a digital product so there’s little overhead.

What Kind of Business Should You Start?

Before you choose the type of business to start, there are some key things to consider:

• What type of funding do you have?
• How much time do you have to invest in your business?
• Do you prefer to work from home or at an office or workshop?
• What interests and passions do you have?
• Can you sell information (such as a course), rather than a product?
• What skills or expertise do you have?
• How fast do you need to scale your business?
• What kind of support do you have to start your business?
• Are you partnering with someone else?
• Does the franchise model make more sense to you?

Consider Popular Business Ideas

Not sure what business to start? Consider one of these popular business ideas:

• Start a Franchise
• Start a Blog
• Start an Online Store
• Start a Dropshipping Business
• Start a Cleaning Business
• Start a Bookkeeping Business
• Start a Clothing Business
• Start a Landscaping Business
• Start a Consulting Business
• Start a Photography Business
• Start a Vending Machine Business

Most entrepreneurs spend more time on their products than they do getting to know the competition. If you ever apply for outside funding, the potential lender or partner wants to know: what sets you (or your business idea) apart? If market analysis indicates your product or service is saturated in your area, see if you can think of a different approach. Take housekeeping, for example—rather than general cleaning services, you might specialize in homes with pets or focus on garage cleanups.

Primary Research

The first stage of any competition study is primary research, which entails obtaining data directly from potential customers rather than basing your conclusions on past data. You can use questionnaires, surveys and interviews to learn what consumers want. Surveying friends and family isn’t recommended unless they’re your target market. People who say they’d buy something and people who do are very different. The last thing you want is to take so much stock in what they say, create the product and flop when you try to sell it because all of the people who said they’d buy it don’t because the product isn’t something they’d buy.

Secondary Research

Utilize existing sources of information, such as census data, to gather information when you do secondary research. The current data may be studied, compiled and analyzed in various ways that are appropriate for your needs but it may not be as detailed as primary research.

Conduct a SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities and threats. Conducting a SWOT analysis allows you to look at the facts about how your product or idea might perform if taken to market, and it can also help you make decisions about the direction of your idea. Your business idea might have some weaknesses that you hadn’t considered or there may be some opportunities to improve on a competitor’s product.

Asking pertinent questions during a SWOT analysis can help you identify and address weaknesses before they tank your new business.

A business plan is a dynamic document that serves as a roadmap for establishing a new business. This document makes it simple for potential investors, financial institutions and company management to understand and absorb. Even if you intend to self-finance, a business plan can help you flesh out your idea and spot potential problems. When writing a well-rounded business plan, include the following sections:

• Executive summary: The executive summary should be the first item in the business plan, but it should be written last. It describes the proposed new business and highlights the goals of the company and the methods to achieve them.
• Company description: The company description covers what problems your product or service solves and why your business or idea is best. For example, maybe your background is in molecular engineering, and you’ve used that background to create a new type of athletic wear—you have the proper credentials to make the best material.
• Market analysis: This section of the business plan analyzes how well a company is positioned against its competitors. The market analysis should include target market, segmentation analysis, market size, growth rate, trends and a competitive environment assessment.
• Organization and structure: Write about the type of business organization you expect, what risk management strategies you propose and who will staff the management team. What are their qualifications? Will your business be a single-member limited liability company (LLC) or a corporation ?
• Mission and goals: This section should contain a brief mission statement and detail what the business wishes to accomplish and the steps to get there. These goals should be SMART (specific, measurable, action-orientated, realistic and time-bound).
• Products or services: This section describes how your business will operate. It includes what products you’ll offer to consumers at the beginning of the business, how they compare to existing competitors, how much your products cost, who will be responsible for creating the products, how you’ll source materials and how much they cost to make.
• Background summary: This portion of the business plan is the most time-consuming to write. Compile and summarize any data, articles and research studies on trends that could positively and negatively affect your business or industry.
• Marketing plan: The marketing plan identifies the characteristics of your product or service, summarizes the SWOT analysis and analyzes competitors. It also discusses how you’ll promote your business, how much money will be spent on marketing and how long the campaign is expected to last.
• Financial plan: The financial plan is perhaps the core of the business plan because, without money, the business will not move forward. Include a proposed budget in your financial plan along with projected financial statements, such as an income statement, a balance sheet and a statement of cash flows. Usually, five years of projected financial statements are acceptable. This section is also where you should include your funding request if you’re looking for outside funding.

Learn more: Download our free simple business plan template .

Come Up With an Exit Strategy

An exit strategy is important for any business that is seeking funding because it outlines how you’ll sell the company or transfer ownership if you decide to retire or move on to other projects. An exit strategy also allows you to get the most value out of your business when it’s time to sell. There are a few different options for exiting a business, and the best option for you depends on your goals and circumstances.

The most common exit strategies are:

• Selling the business to another party
• Passing the business down to family members
• Liquidating the business assets
• Closing the doors and walking away

Develop a Scalable Business Model

As your small business grows, it’s important to have a scalable business model so that you can accommodate additional customers without incurring additional costs. A scalable business model is one that can be replicated easily to serve more customers without a significant increase in expenses.

Some common scalable business models are:

• Subscription-based businesses
• Businesses that sell digital products
• Franchise businesses
• Network marketing businesses

Start Planning for Taxes

One of the most important things to do when starting a small business is to start planning for taxes. Taxes can be complex, and there are several different types of taxes you may be liable for, including income tax, self-employment tax, sales tax and property tax. Depending on the type of business you’re operating, you may also be required to pay other taxes, such as payroll tax or unemployment tax.

Start A Limited Liability Company Online Today with ZenBusiness

Click to get started.

When structuring your business, it’s essential to consider how each structure impacts the amount of taxes you owe, daily operations and whether your personal assets are at risk.

An LLC limits your personal liability for business debts. LLCs can be owned by one or more people or companies and must include a registered agent . These owners are referred to as members.

• LLCs offer liability protection for the owners
• They’re one of the easiest business entities to set up
• You can have a single-member LLC
• You may be required to file additional paperwork with your state on a regular basis
• LLCs can’t issue stock
• You’ll need to pay annual filing fees to your state

Limited Liability Partnership (LLP)

An LLP is similar to an LLC but is typically used for licensed business professionals such as an attorney or accountant. These arrangements require a partnership agreement.

• Partners have limited liability for the debts and actions of the LLP
• LLPs are easy to form and don’t require much paperwork
• There’s no limit to the number of partners in an LLP
• Partners are required to actively take part in the business
• LLPs can’t issue stock
• All partners are personally liable for any malpractice claims against the business

Sole Proprietorship

If you start a solo business, you might consider a sole proprietorship . The company and the owner, for legal and tax purposes, are considered the same. The business owner assumes liability for the business. So, if the business fails, the owner is personally and financially responsible for all business debts.

• Sole proprietorships are easy to form
• There’s no need to file additional paperwork with your state
• You’re in complete control of the business
• You’re personally liable for all business debts
• It can be difficult to raise money for a sole proprietorship
• The business may have a limited lifespan

Corporation

A corporation limits your personal liability for business debts just as an LLC does. A corporation can be taxed as a C corporation (C-corp) or an S corporation (S-corp). S-corp status offers pass-through taxation to small corporations that meet certain IRS requirements. Larger companies and startups hoping to attract venture capital are usually taxed as C-corps.

• Corporations offer liability protection for the owners
• The life span of a corporation is not limited
• A corporation can have an unlimited number of shareholders
• Corporations are subject to double taxation
• They’re more expensive and complicated to set up than other business structures
• The shareholders may have limited liability

Before you decide on a business structure, discuss your situation with a small business accountant and possibly an attorney, as each business type has different tax treatments that could affect your bottom line.

Helpful Resources

• How To Set Up an LLC in 7 Steps
• How To Start a Sole Proprietorship
• How To Start a Corporation
• How To Start a Nonprofit
• How To Start a 501(c)(3)

There are several legal issues to address when starting a business after choosing the business structure. The following is a good checklist of items to consider when establishing your business:

Choose Your Business Name

Make it memorable but not too difficult. Choose the same domain name, if available, to establish your internet presence. A business name cannot be the same as another registered company in your state, nor can it infringe on another trademark or service mark that is already registered with the United States Patent and Trademark Office (USPTO).

Business Name vs. DBA

There are business names, and then there are fictitious business names known as “Doing Business As” or DBA. You may need to file a DBA if you’re operating under a name that’s different from the legal name of your business. For example, “Mike’s Bike Shop” is doing business as “Mike’s Bikes.” The legal name of the business is “Mike’s Bike Shop,” and “Mike’s Bikes” is the DBA.

You may need to file a DBA with your state, county or city government offices. The benefits of a DBA include:

• It can help you open a business bank account under your business name
• A DBA can be used as a “trade name” to brand your products or services
• A DBA can be used to get a business license

Register Your Business and Obtain an EIN

You’ll officially create a corporation, LLC or other business entity by filing forms with your state’s business agency―usually the Secretary of State. As part of this process, you’ll need to choose a registered agent to accept legal documents on behalf of your business. You’ll also pay a filing fee. The state will send you a certificate that you can use to apply for licenses, a tax identification number (TIN) and business bank accounts.

Next, apply for an employer identification number (EIN) . All businesses, other than sole proprietorships with no employees, must have a federal employer identification number. Submit your application to the IRS and you’ll typically receive your number in minutes.

Get Appropriate Licenses and Permits

Legal requirements are determined by your industry and jurisdiction. Most businesses need a mixture of local, state and federal licenses to operate. Check with your local government office (and even an attorney) for licensing information tailored to your area.

• Best LLC Services
• How To Register a Business Name
• How To Register a DBA
• How To Get an EIN for an LLC
• How To Get a Business License

Start an LLC Online Today With ZenBusiness

Click on the state below to get started.

Open a Business Bank Account

Keep your business and personal finances separate. Here’s how to choose a business checking account —and why separate business accounts are essential. When you open a business bank account, you’ll need to provide your business name and your business tax identification number (EIN). This business bank account can be used for your business transactions, such as paying suppliers or invoicing customers. Most times, a bank will require a separate business bank account to issue a business loan or line of credit.

Hire a Bookkeeper or Get Accounting Software

If you sell a product, you need an inventory function in your accounting software to manage and track inventory. The software should have ledger and journal entries and the ability to generate financial statements.

Some software programs double as bookkeeping tools. These often include features such as check writing and managing receivables and payables. You can also use this software to track your income and expenses, generate invoices, run reports and calculate taxes.

There are many bookkeeping services available that can do all of this for you, and more. These services can be accessed online from any computer or mobile device and often include features such as bank reconciliation and invoicing. Check out the best accounting software for small business, or see if you want to handle the bookkeeping yourself.

Determine Your Break-Even Point

Before you fund your business, you must get an idea of your startup costs. To determine these, make a list of all the physical supplies you need, estimate the cost of any professional services you will require, determine the price of any licenses or permits required to operate and calculate the cost of office space or other real estate. Add in the costs of payroll and benefits, if applicable.

Businesses can take years to turn a profit, so it’s better to overestimate the startup costs and have too much money than too little. Many experts recommend having enough cash on hand to cover six months of operating expenses.

When you know how much you need to get started with your business, you need to know the point at which your business makes money. This figure is your break-even point.

In contrast, the contribution margin = total sales revenue – cost to make product

For example, let’s say you’re starting a small business that sells miniature birdhouses for fairy gardens. You have determined that it will cost you $500 in startup costs. Your variable costs are $0.40 per birdhouse produced, and you sell them for $1.50 each.

Let’s write these out so it’s easy to follow:

This means that you need to sell at least 456 units just to cover your costs. If you can sell more than 456 units in your first month, you will make a profit.

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There are many different ways to fund your business—some require considerable effort, while others are easier to obtain. Two categories of funding exist: internal and external.

Internal funding includes:

• Personal savings
• Credit cards
• Funds from friends and family

If you finance the business with your own funds or with credit cards, you have to pay the debt on the credit cards and you’ve lost a chunk of your wealth if the business fails. By allowing your family members or friends to invest in your business, you are risking hard feelings and strained relationships if the company goes under. Business owners who want to minimize these risks may consider external funding.

External funding includes:

• Small business loans
• Small business grants
• Angel investors
• Venture capital
• Crowdfunding

Small businesses may have to use a combination of several sources of capital. Consider how much money is needed, how long it will take before the company can repay it and how risk-tolerant you are. No matter which source you use, plan for profit. It’s far better to take home six figures than make seven figures and only keep $80,000 of it.

Funding ideas include:

• Invoice factoring: With invoice factoring , you can sell your unpaid invoices to a third party at a discount.
• Business lines of credit: Apply for a business line of credit , which is similar to a personal line of credit. The credit limit and interest rate will be based on your business’s revenue, credit score and financial history.
• Equipment financing: If you need to purchase expensive equipment for your business, you can finance it with a loan or lease.
• Small Business Administration (SBA) microloans: Microloans are up to $50,000 loans that can be used for working capital, inventory or supplies and machinery or equipment.
• Grants: The federal government offers grants for businesses that promote innovation, export growth or are located in historically disadvantaged areas. You can also find grants through local and regional organizations.
• Crowdfunding: With crowdfunding , you can raise money from a large group of people by soliciting donations or selling equity in your company.

Choose the right funding source for your business by considering the amount of money you need, the time frame for repayment and your tolerance for risk.

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You need to have insurance for your business , even if it’s a home-based business or you don’t have any employees. The type of insurance you need depends on your business model and what risks you face. You might need more than one type of policy, and you might need additional coverage as your business grows. In most states, workers’ compensation insurance is required by law if you have employees.

Work With an Agent To Get Insured

An insurance agent can help determine what coverages are appropriate for your business and find policies from insurers that offer the best rates. An independent insurance agent represents several different insurers, so they can shop around for the best rates and coverage options.

Basic Types of Business Insurance Coverage

• Liability insurance protects your business against third-party claims of bodily injury, property damage and personal injury such as defamation or false advertising.
• Property insurance covers the physical assets of your business, including your office space, equipment and inventory.
• Business interruption insurance pays for the loss of income if your business is forced to close temporarily due to a covered event such as a natural disaster.
• Product liability insurance protects against claims that your products caused bodily injury or property damage.
• Employee practices liability insurance covers claims from employees alleging discrimination, sexual harassment or other wrongful termination.
• Workers’ compensation insurance covers medical expenses and income replacement for employees who are injured on the job.
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Business tools can help make your life easier and make your business run more smoothly. The right tools can help you save time, automate tasks and make better decisions.

Consider the following tools in your arsenal:

• Accounting software : Track your business income and expenses, prepare financial statements and file taxes. Examples include QuickBooks and FreshBooks.
• Customer relationship management (CRM) software : This will help you manage your customer relationships, track sales and marketing data and automate tasks like customer service and follow-ups. Examples include Zoho CRM and monday.com.
• Project management software : Plan, execute and track projects. It can also be used to manage employee tasks and allocate resources. Examples include Airtable and ClickUp.
• Credit card processor : This will allow you to accept credit card payments from customers. Examples include Stripe and PayPal.
• Point of sale (POS) : A system that allows you to process customer payments. Some accounting software and CRM software have POS features built-in. Examples include Clover and Lightspeed.
• Virtual private network (VPN) : Provides a secure, private connection between your computer and the internet. This is important for businesses that handle sensitive data. Examples include NordVPN and ExpressVPN.
• Merchant services : When customers make a purchase, the money is deposited into your business account. You can also use merchant services to set up recurring billing or subscription payments. Examples include Square and Stripe.
• Email hosting : This allows you to create a professional email address with your own domain name. Examples include G Suite and Microsoft Office 365.

Many business owners spend so much money creating their products that there isn’t a marketing budget by the time they’ve launched. Alternatively, they’ve spent so much time developing the product that marketing is an afterthought.

Create a Website

Even if you’re a brick-and-mortar business, a web presence is essential. Creating a website doesn’t take long, either—you can have one done in as little as a weekend. You can make a standard informational website or an e-commerce site where you sell products online. If you sell products or services offline, include a page on your site where customers can find your locations and hours. Other pages to add include an “About Us” page, product or service pages, frequently asked questions (FAQs), a blog and contact information.

Optimize Your Site for SEO

After getting a website or e-commerce store, focus on optimizing it for search engines (SEO). This way, when a potential customer searches for specific keywords for your products, the search engine can point them to your site. SEO is a long-term strategy, so don’t expect a ton of traffic from search engines initially—even if you’re using all the right keywords.

Create Relevant Content

Provide quality digital content on your site that makes it easy for customers to find the correct answers to their questions. Content marketing ideas include videos, customer testimonials, blog posts and demos. Consider content marketing one of the most critical tasks on your daily to-do list. This is used in conjunction with posting on social media.

Get Listed in Online Directories

Customers use online directories like Yelp, Google My Business and Facebook to find local businesses. Some city halls and chambers of commerce have business directories too. Include your business in as many relevant directories as possible. You can also create listings for your business on specific directories that focus on your industry.

Develop a Social Media Strategy

Your potential customers are using social media every day—you need to be there too. Post content that’s interesting and relevant to your audience. Use social media to drive traffic back to your website where customers can learn more about what you do and buy your products or services.

You don’t necessarily need to be on every social media platform available. However, you should have a presence on Facebook and Instagram because they offer e-commerce features that allow you to sell directly from your social media accounts. Both of these platforms have free ad training to help you market your business.

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To scale your business, you need to grow your customer base and revenue. This can be done by expanding your marketing efforts, improving your product or service, collaborating with other creators or adding new products or services that complement what you already offer.

Think about ways you can automate or outsource certain tasks so you can focus on scaling the business. For example, if social media marketing is taking up too much of your time, consider using a platform such as Hootsuite to help you manage your accounts more efficiently. You can also consider outsourcing the time-consumer completely.

You can also use technology to automate certain business processes, including accounting, email marketing and lead generation. Doing this will give you more time to focus on other aspects of your business.

When scaling your business, it’s important to keep an eye on your finances and make sure you’re still profitable. If you’re not making enough money to cover your costs, you need to either reduce your expenses or find ways to increase your revenue.

Build a Team

As your business grows, you’ll need to delegate tasks and put together a team of people who can help you run the day-to-day operations. This might include hiring additional staff, contractors or freelancers.

Resources for building a team include:

• Hiring platforms: To find the right candidates, hiring platforms, such as Indeed and Glassdoor, can help you post job descriptions, screen résumés and conduct video interviews.
• Job boards: Job boards such as Craigslist and Indeed allow you to post open positions for free.
• Social media: You can also use social media platforms such as LinkedIn and Facebook to find potential employees.
• Freelance platforms: Using Upwork, Freelancer and Fiverr can help you find talented freelancers for one-time or short-term projects. You can also outsource certain tasks, such as customer service, social media marketing or bookkeeping.

You might also consider partnering with other businesses in your industry. For example, if you’re a wedding planner, you could partner with a florist, photographer, catering company or venue. This way, you can offer your customers a one-stop shop for all their wedding needs. Another example is an e-commerce store that partners with a fulfillment center. This type of partnership can help you save money on shipping and storage costs, and it can also help you get your products to your customers faster.

To find potential partnerships, search for businesses in your industry that complement what you do. For example, if you’re a web designer, you could partner with a digital marketing agency.

You can also search for businesses that serve the same target market as you but offer different products or services. For example, if you sell women’s clothing, you could partner with a jewelry store or a hair salon.

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To rank the best states to start a business in 2024, Forbes Advisor analyzed 18 key metrics across five categories to determine which states are the best and worst to start a business in. Our ranking takes into consideration factors that impact businesses and their ability to succeed, such as business costs, business climate, economy, workforce and financial accessibility in each state. Check out the full report .

Starting a small business takes time, effort and perseverance. But if you’re willing to put in the work, it can be a great way to achieve your dreams and goals. Be sure to do your research, create a solid business plan and pivot along the way. Once you’re operational, don’t forget to stay focused and organized so you can continue to grow your business.

How do I start a small business with no money?

There are several funding sources for brand-new businesses and most require a business plan to secure it. These include the SBA , private grants, angel investors, crowdfunding and venture capital.

What is the best business structure?

The best business structure for your business will depend entirely on what kind of company you form, your industry and what you want to accomplish. But any successful business structure will be one that will help your company set realistic goals and follow through on set tasks.

Do I need a business credit card?

You don’t need one, but a business credit card can be helpful for new small businesses. It allows you to start building business credit, which can help you down the road when you need to take out a loan or line of credit. Additionally, business credit cards often come with rewards and perks that can save you money on business expenses.

Do I need a special license or permit to start a small business?

The answer to this question will depend on the type of business you want to start and where you’re located. Some businesses, such as restaurants, will require a special permit or license to operate. Others, such as home daycare providers, may need to register with the state.

How much does it cost to create a business?

The cost of starting a business will vary depending on the size and type of company you want to create. For example, a home-based business will be less expensive to start than a brick-and-mortar store. Additionally, the cost of starting a business will increase if you need to rent or buy commercial space, hire employees or purchase inventory. You could potentially get started for free by dropshipping or selling digital goods.

How do I get a loan for a new business?

The best way to get a loan for a new business is to approach banks or other financial institutions and provide them with a business plan and your financial history. You can also look into government-backed loans, such as those offered by the SBA. Startups may also be able to get loans from alternative lenders, including online platforms such as Kiva.

Do I need a business degree to start a business?

No, you don’t need a business degree to start a business. However, acquiring a degree in business or a related field can provide you with the understanding and ability to run an effective company. Additionally, you may want to consider taking some business courses if you don’t have a degree to learn more about starting and running a business. You can find these online and at your local Small Business Administration office.

What are some easy businesses to start?

One of the easiest businesses to start also has the lowest overhead: selling digital goods. This can include items such as e-books, online courses, audio files or software. If you have expertise in a particular area or niche, this is a great option for you. Dropshipping is also a great option because you don’t have to keep inventory. You could also buy wholesale products or create your own. Once you create your product, you can sell it through your own website or third-party platforms such as Amazon or Etsy.

What is the most profitable type of business?

There is no one answer to this question because the most profitable type of business will vary depending on a number of factors, such as your industry, location, target market and business model. However, some businesses tend to be more profitable than others, such as luxury goods, high-end services, business-to-business companies and subscription-based businesses. If you’re not sure what type of business to start, consider your strengths and interests, as well as the needs of your target market, to help you choose a profitable business idea.

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Katherine Haan is a small business owner with nearly two decades of experience helping other business owners increase their incomes.