Break even analysis should be important for business owners to evaluate their business before deciding to start it. In service industry, calculating break even is more simple than merchandising or manufacturing industry. Because, no significant direct or variable cost need to be included in the calculation as you can see in this break even analysis template below.
There are plenty of business models in service industry. Several samples of business models that fall into this category are :
- Consultation services : architects, law firm, notary, education consulting
- Artists : web design, photography, graphic design
- Salon business : hair salon, manicure and pedicure, barbershop, beauty salon (there are shampoo, water, vitamin, hair color that you can put them into variable cost)
- Event organizer : wedding organizer, party planner
- Rental services : car rental, party equipment, kitchen equipment, costume (car and equipment are considered as assets which can be excluded from break even analysis)
- And more
To run break even analysis, you just need to create expenses projection. And basically, that expenses is your target to break even. You need to sell with that expenses as your minimum sales target. You can add variable cost, for example for salon business, and put its cost as monthly average.
Remember that break even is not similar with return on investment calculation. Its objective is to run business without using investment capital anymore. If your business income is higher than the operating expenses, than you are running a good business. That’s called a profit. On the other side, you keep feeding your business with your capital, then you got problems. It is a loss.
Do not think about complicated break even formulas. It is easy to calculate break even if your business falls into services category above. Your operating expenses is your break even target.