Many business owners turn all their attention to profitability when they should actually be looking at their break-even point. Understanding the point at which a business breaks even is essential for making important decisions, from setting prices to putting up your ambulance business for sale.
What Is the Break-Even Point?
The break-even point is exactly what it sounds like. It’s the point at which income exactly covers fixed and variable expenses, without either a profit or loss. When the amount you receive from sales exceeds the determined break-even point, that’s when profit is created.
Let’s say you have a medical transportation business that brings in one million dollars in its first year. It may feel like a lot, but if you spent a million to make it happen, you’re not off to a very good start. To make your business successful, you’ll need to increase prices or cut costs. Since the BEP is the lower level of profit, it is an especially helpful tool when determining a strong strategy for net profit.
Importance of Break-Even Analysis
A company’s break-even point is an essential component of any ambulance business plan. Break-even analysis is used to calculate the margin of safety, or the amount of profit to expect over the BEP.
Break-even analysis can be useful for everything from helping employees understand how much money actually goes back into the business to illustrating the potential for profits to an interested buyer when you put your medical transportation business on the selling block. On a day-to-day basis, the BEP helps business owners make important decisions about issues like equipment purchasing, hiring, and pricing.
For instance, what will be the break-even margin if you add one additional driver, which will require training costs and a new salary? What if you add the principal and monthly interest payments that come with a business loan? By analyzing the way cost adjustments will impact the BEP, you can determine their ultimate value.
Of course, the break-even point is only a planning tool. It’s up to you to decide what to do with the data. If you discover that your ambulance company will only break even after providing 1,000 rides per year, is that a feasible goal for your business? Simply raising prices to cover your expenses without increasing value is a surefire way to drive away customers. Instead, you may wish to add promotions, discounts, or other perks.
Your BEP illustrates how much you earn every time you provide a service and how much you can raise profitability by cutting costs and making value-enhancing reinvestments. Of course, the decisions an owner makes based on the break-even point will vary by industry and company. A professional transportation business broker can help you choose the right reinvestments for improving company value and your bottom line.