Here at Accountancy Extra we are huge fans of Michael Gerber and the book E…
Your breakeven point is that point in time when your income equals your expenses. Once you get past that point and your income exceeds your expenses, then you are making a profit. If your expenses exceed your income, then you are making a loss.
All that sounds relatively straightforward, I’m sure. But knowing what your breakeven point is within your business is absolutely vital. If your business doesn’t sell enough to meet it’s everyday expenditure and support you as the business owner, then you are going to be in trouble, sooner rather than later. By knowing the level of sales that you need to hit your breakeven point, you’ll have a target each day, week and month that you know you need to hit, just to stay in business.
A tale of two businesses – The impact of breakeven analysis
I’ve had two seperate conversations in the last couple of weeks about breakeven points with business owners and they both showed me the power behind knowing or not knowing where the breakeven point was.
The first business owner sold consultancy based services to their clients and charged on a time spent basis. They knew that if they charged 40 hours per week at £x per hour, then they would have a gross sales revenue that would represent a good income. However, they had no idea that to actually cover their overheads and personal expenditure each month, they had to charge out 30 hours per week, i.e. 3/4 of the total chargeable time available. Once we’d worked out how many hours per week were spent on non chargeable time (meetings, research, training etc), it soon became clear that there was a problem. Indeed, the business owner commented “so that’s why I don’t make any money”. Once they knew what they had to achieve, they went away to change the business model and re look at their pricing strategy.
Compare this to the owner of a local chain of sandwich shops. He knows, on average, how many sandwiches he needs to sell each day to break even and he records this. At 3pm each day, he calls all the shops and asks for the sales figures, not just the £value, but the volume as well. He understands the gross profit margin on his sales values and as he knows his breakeven point, he can quickly work out a rough profit figure for the day. He records all this on a spreadsheet and regularly monitors his calculations against the “real results” when his books are written up.
Increase your profits, know your breakeven
Make sure you fully understand your breakeven position. It is one of the most powerful business tools you have at your disposal. Armed with it you can make informed desicions about your pricing strategy, staffing levels, marketing strategy and expansion plans.