Rising employment costs: Will you break even?

Upcoming National Insurance and National Living Wage increases in April 2025 will impact your break-even point. Learn how to recalculate and adapt your business strategy to maintain profitability.

Running a profitable business means understanding your break even point – that crucial juncture where revenue precisely matches costs. Every penny earned beyond this point contributes to your bottom line. Calculating it is essential for determining the sales volume needed to cover expenses, informing pricing strategies, managing costs, and ultimately, boosting profitability.

But what happens when a significant cost factor changes? With the upcoming increases to the National Living Wage and National Insurance contributions in April 2025, many businesses will face a substantial hike in employment costs. This means it’s more critical than ever to revisit and recalculate your break-even point.

Let’s recap how to calculate it, and then we’ll discuss how these rising employment costs impact the equation:

How is Break Even Point Calculated?

Here’s the breakdown:

1. Calculate your required personal income: Determine the amount you need to take home to cover living expenses, plus the anticipated tax on that sum. This is your gross required income.
2. Calculate the running costs of your business: Identify all of the costs your business has to spend which are not dependant on the volume of sales. These expenses include expenditure on things like rent, administrative salaries, software subscriptions. Be realistic and include a contingency for potential price increases and unforeseen expenses, especially considering the upcoming wage and National Insurance hikes.
3. Calculate total costs: Add your gross required income to your business overheads.
4. Determine your Gross Profit Margin: This is the percentage of profit from each sale after deducting costs directly attributable to the sale, the costs of producing the product or service. We can help you distinguish between direct costs and overheads.
5. Calculate the Break-Even Point: Divide your total costs by your gross profit margin.

The Impact of Rising Employment Costs

The increases to the National Living Wage and National Insurance in April 2025 directly impact the costs of running a business. These changes will likely increase your wage bill, a significant component of your overheads. This means your total costs will rise, and consequently, your break-even point will shift upwards. You’ll need to put together a budget for the year end to cover the increases.

At the very least you need to recalculate your break even to include everything including market rate salary and all taxes

Need help recalculating? 

A Break Even Analysis with us will help you:

• Unmask the true cost of the NI hike
• Craft a profit-boosting action plan so you gain your desired/required net income
• Set competitive prices that maximise your earnings
• Identify cost-cutting opportunities without sacrificing quality
• Set ambitious sales targets to drive growth
• Create a 12-month budget to stay on track

Many business owners find break even calculations challenging. We’re here to help.

• Existing Clients: If you’re already a client, your Client Manager can help you recalculate your break-even point to reflect these upcoming changes.
• New Clients: Book a free consultation to discuss your business challenges, future plans, and, of course, calculate your updated break even point.

You’ve Got Your New Break-Even Point – Now What?

Once you have your updated break-even figure, it’s time to make strategic decisions:

1. Adjust Sales Targets: Consider the impact of seasonal fluctuations. Simply dividing your annual break even point by 12 won’t suffice. Factor in seasonal variations and adjust your targets accordingly. For instance, if a significant portion of your turnover occurs before Christmas, your break even target for that period should reflect that.
2. Revisit Pricing: Balancing cost coverage with market competitiveness is crucial. Knowing your new break-even point helps you set prices that ensure profitability while remaining attractive to your target market. Have you recently reviewed your pricing strategy?
3. Optimise your sales mix: Identify your most profitable products or services and focus efforts on promoting them. (This will increase your Gross Profit Margin).
4. Review Overheads: Can you reduce costs elsewhere to offset the increased employment expenses without compromising quality? Review utility bills, negotiate with suppliers, and identify any areas for savings. You may want to consider if there are efficiencies to be made within processes to achieve more within less time and money.

Keeping a close eye on your break even point, especially in light of these changing employment costs, allows you to make informed decisions about pricing, cost control, and overall business strategy.

Need help recalculating your break even point to account for the upcoming wage and National Insurance changes? Schedule a free consultation with us today.