Break Even Point
Why is your break even point so important?
Gain an insight into the accuracy of your sales goals and prices.
Want to move premises, purchase a new PC, employ someone new or invest in your business? Whatever you want to spend your money on, knowing your break even point can help quell any niggling doubts. Any rational business mogul will think twice about spending money unless it earns them money. Knowing what break even revenue you make is crucial because it helps determine what you should charge for your products or services. If the amount of sales a business needs to break even is more than it can realistically achieve in a year, then that business has a problem. A problem we can help solve. By calculating your break even point, we can help you gain a better understanding of your business. Understandably, you know the products and services you offer. However, you might not know whether your products or services are optimally priced. With this figure in mind, you’ll know exactly how much more of a product or service to sell to break even and push your business in the right direction.
By gaining a fundamental understanding of your financials, you’ll know how much more you will need to turn a profit.
Better still, knowing your break even point will help you in times of struggle. This point will help you cover the costs to make those products or provide those services. This figure will help determine where you can cut costs to keep your business afloat. In layman’s terms, the higher the fixed cost of your business, the higher your break even point will be. A break even analysis will help you realise the contribution each product or service can make to your business. It’ll help you see which are profitable for the business and whether you need to raise or reduce the price – or discontinue it altogether. It might sound like an intimidating prospect, but determining your break even point is not just a necessity – it’s an opportunity for growth. Countless start-ups fail to account for their direct and indirect costs and how easily they can mount up. Yet, with a concrete figure before you, you can assess the true worth of your business.
With our break even analysis, you can gain an insight into the accuracy of your sales goals and prices
Benefits of our break even point analysis
- Offers a much more solid basis from which to price your products or services
- Helps create concrete sales targets for your team, e.g. timeframes and desired sales
- Mitigates risk by avoiding investing in products or services that won’t generate profit
- A break even analysis is needed for funding for your business or start-up
- A manageable break even point makes it more comfortable to take on extra debt
How do we calculate your business’s break even point?
Take action and create a break even point that’s dynamic instead of static.
A common definition of the break even point is the sales volume – where neither profit nor loss is made. Yet, an alternative way of saying the same thing is that the break even point is the sales volume where:
Total Costs i.e. Direct Costs vs Fixed Costs i.e. Overheads
- Jack and Sarah run a local shop. Their fixed costs are £200,000 and their most popular products earn them £4 per unit. To break even, they need to sell 50,000 units.
- If they were to sell fewer than 50,000 units, they would be putting more money into running the business than they were making from it – causing them to go into the red.
- However, if they sold more than 50,000 units, their sales would eclipse the costs of running the business – resulting in gross profit and them being in the green.
In the above graph there is a line running diagonal (variable costs) and another running horizontal (fixed costs). The horizontal axis features the units of production, whereas the vertical axis features the cost/revenue. The variable costs increases for every unit sold and is essentially gross profit minus total costs. Basically, whatever you sell your product or services for, subtract what it costs you to make each incremental unit. With this in mind, your fixed costs won’t vary, regardless of the number of units sold. Typical examples include overheads like rent, depreciation, and research and development expenditures.
Now, your break even point is where your total costs and sales revenue intersect.
For examples-sake, let’s say your total costs are £200,000, and your sales revenue is £4 per unit. If this were the case, your business would need to sell 50,000 units to break even. If your business were to sell fewer than 50,000 units, your sales revenue would be lower than your total costs. Were this the case, your business would be making a loss and be “going into the red”. However, if your business sells more than 50,000 units, the sales revenue would be higher than the fixed costs. Such a feat would indicate that your business is making a profit, in the green and the all-clear.
Alternatively, let’s take this same break even analysis but display the pricing above as formulas. The following formulas are indicative of your break even point.
- Sales Revenue £ = Fixed Cost (£200,000)
- Volume Sold (50,000) x the Sales Revenue (£4) per unit = the Fixed Cost (£200,000)
- Volume Sold to Break Even (50,000) = the Fixed Cost (£200,000) ÷ by the Sales Revenue (£4) per unit.
- Volume Sold to Break Even (50,000) = the Fixed Cost (£200,000) ÷ by the selling price per unit (£10) – the variable cost per unit (£6).
Now, that’s all very interesting, but what should a business owner do with this information? It’s simple – they should improve by taking action.
The first thing that might come to mind is for a business to try and sell as many units as possible. However, increasing the volume sold is not the only choice the business owner has. They can also work on reducing the fixed costs, increasing the price per unit, or reducing the variable cost per unit. If a business gains such insight and works on all these variables simultaneously, its break even point will become dynamic instead of static.
What is your break even point?
It’s where the business’s net income is zero.
At any given point in time, starting a business has always been a risky venture. Subjectively, this is something anyone can tell you. Yet to find out how risky it is, we recommend asking for a break even analysis. Locating the break even point of your business is a fundamental financial metric. To put it simply, the break even point is where the business’s net income is zero. This point will offer intel on how you can make back any initial investments pumped into your business. Finding the point is determined by comparing the market price of an asset to the original cost.
The break even point is reached where your business’s income is equal to its outgoings.
This point serves as a baseline for businesses, and – provided your business is bobbing along at this level – there will be no gains nor loss of profit. Once your sales reach this point, your business will see its first positive signs of becoming a profitable enterprise.
Unless your income is consistently higher than your outgoings, it will never be self-sufficient.
The outgoings of a business will always initially outweigh the income from any sales. Things like advertising, accounting and web development can take their toll on your bank account. Yet, these outgoings are of paramount importance when building any successful business. Otherwise, it will struggle to gain a steady stream of customers. That’s why the break even point is so important; it acts as an indicator for when this shift – into the red or green territory – might happen.
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