In comparison to fixed costs, variable costs change with the quantity of output. Your company’s variable costs are zero when production is zero and increase as production increase. It’s considered the money you spend when you sell products and services. Variable costs can include, but are not limited to: contractor payments, raw materials, software subscriptions used for client services, etc. Your products and services should be priced to cover the costs.
Unlike fixed costs that stay, well, fixed – variable costs increase as your sales increase.
If you’re unsure that the price of your products and services are viable first consider your variable expenses per unit or sale? Is your price high enough to cover those costs? What your company charges for the final product or service should cover your variable costs (per unit), contribute to your fixed costs and ultimately your overall profits.
Your break-even point, is simply the minimum dollar amount you have to sell to not lose money during a set time period.
Why is it important to understand your break-even point?
Mainly because it will help you determine when you’ll begin to turn a profit and help you price your offering.
There you have it – the most important number in your business. Here are some additional resources to help better understand break-even analysis: Harvard Business School Break-even Analysis Tool and the Accounting Coach Break-even Analysis Course.
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W. Michael Hsu is the founder and CEO of DeepSky, a U.S.-based outsourced accounting department that acts as an in-house accounting department for one to ten million-dollar service companies. With knowledgeable accountants, best practice processes, and carefully selected technology, DeepSky helps entrepreneurs obtain, understand, and then internalize critical business numbers to help move the needle.
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