There is a financial tool that helps business owners manage costs, make better pricing decisions, and improve profits. It's called breakeven analysis. The breakeven point is the sales volume at which a business neither makes a profit nor incurs a loss.

FINDING THE BREAKEVEN POINT

To find the breakeven point, you need to know your variable and fixed costs. Within a reasonable sales range, fixed costs do not vary with sales or production volume. Variable costs are directly proportional to the sales volume. Think of variable costs this way: sales cause variable costs. If sales don't cause the cost, then the cost is fixed.

USING BREAKEVEN ANALYSIS IN PRICING

You also can use breakeven analysis to set bidding or product prices advantageously. Use breakeven analysis to ensure you don't lower prices then find there's not enough volume to maintain previous profit levels. To use breakeven analysis in pricing, think in terms of fixed costs, selling price per unit, and variable costs per unit.