Do you know your break-even amount of sales?

As a business owner/operator, do you know your break-even point? This is the total amount of sales (daily, weekly, monthly, annually) to cover all of your costs of the business. The break-even sales point covers your costs of production as well as your fixed costs, such as rent, income tax, management salaries including your own and other costs that don’t vary whether you’re trading or not.

It is important to know your break-even sales when making business decisions such as product or service pricing, how much more sales would be required to cover new capital or expansion requirements and, ultimately, whether it is viable to remain in business or be better off shutting down (or scaling back).

The break-even point needs to be established and monitored regularly as costs change. In a longer time frame, your fixed costs will also change with rent reviews, salary increases and new undertakings.

The break-even point can be illustrated graphically:

The red line, being straight, indicates the fixed costs of the business, and these don’t vary regardless of the level of sales. The yellow line represents the costs of producing units of sales, such as materials costs, costs of food or other units of sale. The green line is the combination of these two costs. The area to the left of the intersection of the green and blue lines is a loss. The area to the right of the blue and green intersection is profit.

Mathematically, the formula for break-even is as follows;

Break-even = (sales-variable costs) + fixed costs

Identifying your fixed and variable costs is important to properly analyse your business. This also enables a more thorough analysis of where savings can be made and where there is scope to adjust your prices. This then enables the determination of what sales need to be achieved, in both volume of sales and also unit prices.

For assistance in this analysis contact us.