WHAT IS “BREAKING EVEN” AND SHOULD I CARE?
Breaking even is that point for a business where its bottom line is zero – it doesn’t make a profit or a loss. Which sounds like an odd number to be important to know for your business, but it really is. It gives you the target to aim for, to know that it’s the minimum sales target you need to not be losing money that week / month and that once you are above this, you will be making money.
This won’t necessarily be the same number each month as there will be one off costs and exceptional items that will skew the numbers but it is a good indicator and the reality is you want to be getting above the sales needed to be profitable and making money after all, but it is a good base tracker.
So, how do you calculate it? I always suggest taking a least 3 months of profit and loss data, this allows for any lumps and bumps in your data to be seen and smoothed out. Look through your costs, are there any one off oddities in there that you can take out as they just won’t be incurred again (ie new computer). Now add up all the costs that aren’t directly associated with your sales these tend to be relatively static month on month, these are called your overheads and are your staff costs, your light and heat, your rent, software, subscriptions etc., and see what these total, i.e. £1,800.
This gives you a gross profit target that you need each month to get to a zero bottom line.
Hopefully you know what your gross profit % is, but as a reminder it is gross profit / sales as a % (gross profit is turnover less the costs associated with that turnover i.e. cost of goods, delivery in & out etc). If this is 45% then take your gross profit target and divide by 0.45 to get your target sales (in this case £4,000). If you hit these month in month out / week in week out (depending on the time period you used) then you should be breaking even – exceed it and you should be in profit.
Things to remember:
If you are VAT registered add VAT onto the target sales figure so £4,000 becomes £4,800.
When you get into making profit each month you will need to remember to set aside cash for your corporation tax
Breakeven point can be a moving target! As your business grows you will incur more overheads as you may need more people, a bigger office space etc. So remember to recalculate this.
And why is this helpful?
As always .. cash! If you are spending more than you make then you will soon have cashflow issues and knowing what you need to hit to breakeven is one helpful way to monitor and track and can even help with marketing plans – if it’s all going well, why do a discount code but if it’s looking a tight and you need to bump up that number then a quick discount code to your mailing list and best customers might just make that difference.