| Your break even point is probably one of the | | | | insurance, administrative staff, etc fall into this |
| most valuable pieces of information when | | | | category. |
| managing your business. Let's start with a simple | | | | Again, be sure that your accounting records are |
| definition: break even point is a level of sales | | | | accurate and that you can rely on the numbers |
| which you need to generate to cover all your | | | | you will be using in your break even calculations. |
| variable and fixed costs and break even. That | | | | The Result - Your Break Even Point |
| means that the business has not made any | | | | The amount of sales needed to generate enough |
| money and it has also not lost any. Your profit is | | | | margin to cover your fixed costs is your break |
| zero - you broke even. | | | | even point. So, as you can see from the previous |
| Calculating Break Even Sales Point | | | | sentence, your margin and your fixed costs will |
| How is break even sales point calculated? With 3 | | | | both influence your break even point. |
| elements: | | | | Break even analysis will then consist of using that |
| Sales | | | | break even sales point by individual products, by |
| Variable Costs | | | | product groups and your total business to make |
| Fixed Costs | | | | some intelligent decisions regarding your product |
| The accuracy with which you calculate each of | | | | pricing, your variable costs and your overhead. |
| these elements is critical and will determine how | | | | Calculating your break even point will focus your |
| accurate the results of your break even | | | | attention on the key components of your |
| calculation will be, so make sure your financial | | | | business in a way that is bound to discover |
| information is reliable. | | | | non-performing SKUs, areas of overspending and |
| Variable Costs | | | | unprofitable customers. |
| Your variable costs will be those which most | | | | Based on the result of the break even analysis, |
| closely follow your sales - if sales go up, they will | | | | you will be able to set better targets for different |
| go up as well. They will most typically consist of | | | | levels of profit you want to achieve. And you will |
| labor and materials. If you have a production | | | | know how to achieve your targets, because you |
| facility, they will also include direct and indirect | | | | will be very familiar with the driving factors behind |
| overhead for that portion of your overall facility | | | | it by now. |
| costs. | | | | Many business owners cannot arrive at an |
| To give an example, if you sell certain widgets, | | | | accurate break even, because they don't have |
| you will first have to buy them from a vendor. | | | | accurate margin information for their products. |
| That's a variable cost - the more you sell, the | | | | Once their inventory get a little complex, they |
| more you will need to buy. If you sell services, | | | | may lack the commitment or the discipline to |
| the variable cost will be the time of your service | | | | establish accounting systems to track those costs |
| providers. | | | | and calculate product by product margins. |
| Once you have established what your variable | | | | So, the mere fact that you have an accurate |
| costs are and you know your sales, you will be | | | | break even sales point means you have done a |
| able to calculate your margin. This should be done | | | | lot of good homework and know your numbers |
| at the individual product level as well as on the | | | | pretty well. The break even analysis is really the |
| larger level (product groups and total company). | | | | crowning of all that effort and the reward you |
| Fixed Costs | | | | now richly deserve. |
| Your fixed costs are the last element of the | | | | Once you have all the needed pieces, break even |
| break even analysis. They are those costs which | | | | analysis will be the kind of financial information you |
| typically stay fixed, regardless of your sales levels. | | | | will never want to be without! |
| Expenses such as rent, utilities, telephone, | | | | |