When running a business it is sometimes difficult to see the bigger picture. You are working so hard winning new customers and servicing existing, all whilst trying to manage the business finances and administration.
One of the most important calculations you should know, is your break-even point. Once you know this you can use it to help maintain and grow your business, making more informed and timely decisions.
Your break-even point is the point at which you ‘break-even’, neither making nor losing money. This will tell you the total value of sales you need to generate to cover your fixed overheads.
If you have more than one product or service it is advisable to calculate this for each separate item. This often proves interesting, as you may find that a particular product or service takes less effort to break-even than others. At this point it is also worth calculating your gross profit margin (sales – cost of sales) in order to ascertain which items make you the most money. After calculating both of these, you should be able to see which items you should spend most of your marketing time on, therefore maximising your profit.
To calculate your break-even point you will need to do the following:
SALES – DIRECT COST OF SALES = CONTRIBUTION
FIXED OVERHEADS / CONTRIBUTION = BREAK-EVEN POINT
As an example:
Selling price: £100
Cost of Sales: £50
Fixed Overheads: £10,000
Therefore, the break-even point equals:
100 – 50 = £50 or 50% (Contribution)
1000/50 = 200 units or £20,000
If you would like to discuss your business with one of our accountants, please do not hesitate to contact us.