Start-up companies almost always lose money at first, and reaching the breakeven point and starting to earn a profit is a huge milestone that business owners always plan to achieve. Tying the breakeven question into the available market for the goods or services that your business provides can be a useful way to think about how to achieve your financial goals. Let's take a closer look at how you can bring these two concepts together and take action accordingly.
Answering the breakeven question
Companies have costs that they need to cover in order to break even. Some of those costs are fixed, such as salaries, rent, and insurance. Other costs vary depending on how much you choose to produce or sell.
In order to figure out a breakeven point, you have to calculate how much of your product or service you'll need to sell in order to cover those costs. One simple way to do that calculation is to figure out your net profit per unit, incorporating the variable costs of production but not the fixed costs of the business. Then, you can divide the fixed costs by your per-unit profit to come up with a breakeven production figure.
For example, say you have fixed costs of $10,000 per month and you sell a product for $50 that costs $30 per unit to make. In that case, your per-unit profit is $50 minus $30 or $20. Dividing $10,000 by $20 per unit, you can figure out that you'll need to sell 500 units per month to break even.
Bringing in market share
Knowing your breakeven production capacity is important, but it's not the final step in assessing whether you have a realistic chance of reaching your goal. You also need to consider the size of the market and the extent of competition. In general, the lower the market share needed for you to reach your breakeven point, the better the chances that you'll do so.
For instance, take the example above. If you know that demand for products like yours add up to 50,000 units per month, then your 500-unit breakeven point represents market share of 1%. That would be an ambitious but attainable goal for a new entrant in some industries to achieve within a relatively short period of time.
By contrast, if you think that demand for products like yours is only 1,000 units, then reaching your breakeven point will require that you achieve a 50% market share. Unless there's no viable competition in your market, that will be a tough target for most businesses to achieve.
Reaching breakeven is a key goal for every new business, but you have to look at the size of the potential market to assess whether it's realistic. Linking up your breakeven production to the market share figure it implies will give you a good reading on your prospects for success.
If you're interested in learning more about stocks, consider checking out our broker center.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at email@example.com. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.