If you want to drive your business to make a profit, you’re going to need to know and understand your break even point.

The phrase “breakeven point” refers to the point at which your revenue equals your costs. Once you reach this point, any additional income generated each month is profit.

Conducting a breakeven analysis is vital for determining the level of sales you need to achieve in order to cover your costs and is expected as part of a business plan.

It is the businesses that have a good understanding of what they need to achieve in sales every day that survive economic downturns and go from strength to strength.

How to calculate it

  1. First, calculate what you need to take home in order to meet all your living costs + the tax you are likely to pay on this sum = this is your gross drawings.
  2. Your Gross Drawings + Overheads (i.e general running costs of the business) = Total Costs. Your calculation must be realistic and include a contingency figure for price increase and unforeseen costs.
  3. Work out your Gross Profit Margin (The percentage of profit that you make on each sale of your service or product after deducting the cost of producing it, known as “direct costs”). Note: We can help you to figure out which costs are direct costs and which are overheads.
  4. Total costs/Gross Profit Margin = Break-Even Point

Struggling to make the calculation? Don’t worry! Few business Owners are confident enough to try and calculate their own break even point. That’s why we’re here, armed with calculators, a long-lasting history with spreadsheets, and plenty of experience helping businesses like yours.

But once you have the figure, then what?

Okay, so you’ve got your figure, but what do you need to use it for?

1. Set weekly sales targets

Most businesses are seasonable to some degree, so dividing the break-even point by 12 will likely not give you an appropriate monthly target. If you have established that 35% of your turnover is made in the run up to Christmas, then your breakeven point for that quarter should be 35% of your annual target. Effectively to break-even for the year, you need to make a bigger profit in some months to compensate for the loss in others.

2. Can you tighten the belt a bit?

Take a look at some of your overheads – are you able reduce your costs anywhere? When was the last time you had a look at your utility bills? Run your business by the same standards you live by in your home, and make sure that you’re comparing costs to find the fairest price.

3. Can you increase your higher value services or products?

If your sales are not at the level required, you may want to think about raising the cost of some of your services/products with a big sales push. You may just want to benchmark these costs against comparable items first, to make sure you’re not pricing yourself out of the market.

In this article we’ve included a download of an exercise we run through with our clients – Calculating your real Breakeven Point. Request your free copy today by emailing discovery@a4g-llp.co.uk so you can focus on driving your business to make a profit, and start earning what you want.

Want to find out more?

Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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