The break-even point is usually defined as where revenue equals cost so profit is zero. Break-even analysis helps reduce a world of potential outcomes to a yes/no decision. Breakeven isn’t the final answer on projects, but it’s a way to help simplify questions. The answers to those questions, along with other data and analysis, can help you make the right decision
If you ask 100 people for a revenue projection for a project, you will probably get 100 different answers. When a group has many options to decide between, it’s very hard for them to make a decision. Getting to a decision with this many options takes lots of time.
I’ve also had sales or revenue projection conversions that go like this:
Me: “What do you think revenues will be in the first year for the project?”
The person I’m meeting with: “I don’t know.”
Yes, they truly don’t know. This is a fact, but it’s not very helpful for building a projection. How do we move the conversation forward?
One way is to keep working with this person to arrive at a number or a range of numbers they think is reasonable. Another way is to see if they think the project sales can exceed the breakeven amount. Breakeven is usually defined as where revenue equals cost so profit is zero.
Many projects are usually a yes/no decision. For example, you will open a new location, or you won’t. Yes, there can be many decisions about the size of the location, the number of new locations in a market, etc.
However, the purpose of break-even analysis is to reduce the question to a yes/no decision of open or don’t open the location. This is matched with the yes/no decision of whether we think we can sell enough to hit our breakeven amount.
Breakeven isn’t the final answer on projects, but it’s a way to help simplify questions. The answers to those questions, along with other data and analysis, can help you make the right decision.
I wish you clarity on complex decisions. I wish you well.
- Rob Stephens
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