Understanding your breakeven point and 5 ways to use it in your business
So following on from the last few weeks talking about making your finances better, I’d like to talk about breakeven this week.
I think this is one of the most important numbers to have in your head, particularly if you’ve a lot of fixed overheads but it’s something that many businesses just don’t know.
What is it?
Your breakeven point is the amount of sales at which you just cover all of your costs, including your dividends and corporation tax. It really is worth taking some time to get this calculation right. I’ve seen many companies use a figure that’s way out of date, or hasn’t been calculated correctly and so they’re running their business around the wrong figure.
What figures do you need to calculate it?
What your fixed costs are – i.e. the overheads that don’t fluctuate depending on sales. An average gross margin % (this might fluctuate with product mix) All variable costs should be included your gross margin % Your monthly dividends If you have debt, the amount you pay in capital repayments. If the total amount of your debt repayments are roughly equal to your depreciation + interest cost then don’t include this, however if the debt repayments are more then, you’ll need to include something to cover this expense) Typically this will happen if you have assets being depreciated over a long time, but debt over a shorter time period, eg a commercial mortgage, long life plant & machinery)
(If you’d like an excel model to drop your figures into, just drop me an email (link sends e-mail))
Using your break even
1) Divide your monthly breakeven by 4 to get the weekly figure, and use this in your flash report so you know if you’ve made a profit each week.
2) Use it as a yardstick for your team to understand what it takes to cover overhead and get into profit.
3) See the effect of taking on a new overhead, how much sales will need to increase by to cover it.
4) See how changes to pricing or product mix change the margin and therefore the sales needed.
5) Use it to see what efficiencies can be made to lower the break even sales. And just make sure you revisit it regularly to see if your overheads or average gross margin have changed.
And if you’d like some help working it out, just give me a shout!