Break-even is a central concern for many retailers as they grapple with the business impacts of the COVID-19 virus.
Here we explain how it is calculated and various concrete and achievable measures to be taken by retailers and budget teams to achieve it.
Calculating the break-even point also helps to shed light on difficult decisions to make regarding opening, reopening or even closing a store.
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What is break-even calculation?
“Break-even analysis calculates how much revenue you need to cover your costs,” says Rob Stephens, CPA, founder of CFO Perspective. “It’s a fact-check for any investment in your business, whether it’s launching a new product or opening a new store.”
When deciding whether to add a product line or open a new store, retailers have to make a lot of guesswork. They rarely know in advance how much of a new product they will sell or what the sales of a new store will be. Fortunately, cost forecasts are often more accurate than sales forecasts.
Don’t think “sales”: think “costs”
In 2020, it has become much more difficult to reliably forecast sales as the COVID-19 virus changes consumer behavior every month, and even every week. In a nutshell: consumers are buying differently now.
“I’ve done a lot of projections,” says Rob Stephens. “When I ask someone how much they’re going to sell for, they usually say, ‘I don’t know.’ That’s absolutely true, but it doesn’t help you make a decision.”
“Calculating the break-even point simplifies the issue by determining the minimum sales required to cover your costs. It’s much easier to know whether you can exceed the sales required to break even than it is to guess your future sales,” continues Rob Stephens.
What is the use of break-even calculation for retailers?
According to Rob Stephens, “Calculating the break-even point is very useful for a new product or a price change of an existing product.” “For example, how many more units would you have to sell, without reducing your total profits, if you lowered your prices by 10 percent?”
