What is a breakeven analysis and why should one be included in business plan?

A break-even analysis is a financial tool that helps businesses determine the sales revenue needed to cover their total costs (i.e., the point at which the business is neither making a profit nor a loss).

Why should a break-even analysis be included in a business plan?

1. Financial sustainability: It demonstrates the business's financial viability by showing that the potential revenue can support the projected expenses.

2. Cost-effective strategies: It allows entrepreneurs to identify revenue goals and helps guide their pricing and marketing strategies to achieve profitability.

3. Informed resource allocation: By understanding the break-even point, entrepreneurs can allocate resources efficiently, focusing on activities that have the highest potential return on investment.

4. Planning for growth: Break-even analysis provides insights into the sales volume needed to sustain the business and its growth plans, helping entrepreneurs make informed decisions about expansion and future investments.

5. Risk assessment and contingency planning: It assists entrepreneurs in identifying vulnerable areas in their business model, such as high fixed costs or low-profit margins. This enables them to develop contingency plans to mitigate potential losses.

6. Funding requirements: Investors and lenders often request break-even analysis as part of their due diligence process when considering a business plan. It provides them with a clear understanding of the business's financial feasibility.

7. Business forecasting: Break-even analysis is a foundation for forecasting future financial performance, allowing entrepreneurs to make informed projections and plan for various scenarios.