Do you know your business break-even point? Have you re-calculated it recently? The break-even point is a must-know piece of information for every business.
If you haven’t heard of a break-even point before, it’s quite a simple concept. It is the point where your revenue = total costs. At this point there is no profit or loss, you ‘break-even’.
The break-even point helps in deciding prices, setting sales budgets and preparing business plans for financiers or investors. It is also a useful tool to explore the important profit drivers in your business, such as sales volume, average production costs and average sales price.
How to Calculate ‘Break-Even’
A simplified method for calculating your break-even point is fixed costs ÷ gross profit %.
Break-Even Point = fixed costs ÷ gross profit %
Fixed costs exist whether you sell 1 or 100 products each month, and include overheads such as rent, non-direct wages, power, telephone accounts and insurance. Your gross profit margin is the percentage of sales dollars left after deducting cost of sales from the total sales figure. [For further detail on what your fixed costs are and how your gross profit margin is calculated refer to our recent article on How to Read your Profit & Loss Statement].
So now you understand what a break-even point is and maybe even had a crack at roughly calculating what your point is, let’s examine the top 3 reasons you really need to know it.
#1 Set your Prices for Products/Services… Correctly
Working out what to price products & services at is a common question we get from new businesses and existing business. Many different factors come in to play when determining prices such as competition, quality of product/service, who your customers are and what that product costs you to buy, make & sell… that is your break-even point for the product. If you are determining your prices without knowing what it costs you, then you could be creating an unprofitable product line from the start.
#2 How many Products/Services you need to Sell
As business owners we’ve all been there, the pressure to find the next customer or push out the completed service mounts and you haven’t prepared a budget or calculated your break-even point, so you don’t know that you need to sell 10,000 widgets this month to cover costs.
Knowing your breakeven point means you can focus on reaching the sales target & also implementing strategies to make sure next month’s sales target is achieved also.
#3 How an Increase in Price or Volume will affect Profit
This is my favourite and very powerful one to know. Your break-even point can give you insights into what may be the most effective way to increase profit in your business, for example – a 1% increase in prices or volume.
For example, a café has an average sale of $10, with variable costs (cost of food, packaging) of $4, giving a gross profit of $6 per sale (or 60% Gross Profit %). Fixed costs per day are $750.
- The break-even point is – $1,250 (Fixed costs $750 / Gross Profit% of 60%).
- The break-even sales units are – 125 sales per day (Fixed costs $750 / Gross Profit per sale $6).
- If the café owner wanted to make $450 profit a day, they would need to make 200 average sales per day at $10.
- If the café owner increased prices by 1%, to make the same $450 profit a day, they would only need to make 172 sales per day (28 less per day).
Remember knowledge is power, knowing your break-even point can be critical to surviving your first few years in business to knowing the best way to improve profits for existing businesses.
Would you like assistance calculating any of these measures or reviewing your product pricing for your business, contact our team on (07) 3849 3816 or email Karen Goad at hello@goadaccountants.com.au to arrange an appointment.
