Is your business profitable? Know your break-even point

A number one rule for business is to know your break-even point when it comes to profitability. Many business owners pay close attention to their profitability instead of focusing on their break-even point. To find out if your business is profitable, look at your break-even point and your break-even margin. When you know your break-even point across certain services, products, and overall business operations, it’s the key to strategic planning, sustaining, and increasing long-term profitability.

The break-even point is defined as the point where sales or income equals expenses. No gains are made or losses are incurred at breakeven. This number is important to anyone running a business, as the break-even point is the lower limit of profit when pricing and margining. Obviously, the break-even point looms large when calculating a net profit strategy.

If you own a business with a home office or have a business with many employees, your break-even point includes the total cost of running your business and the amount you pay yourself as salary. An important key to your overall operation is his salary, without him you could not afford to keep your business running. Your salary should not be considered a profit, but include it in the break-even analysis. Profit is the difference between the breakeven point and the amount you charge for the products or services.

Also look at break-even margin, which is a ratio that shows the gross margin factor for a break-even condition. The formula is total expenses divided by net income multiplied by 100 to get a percentage. This relationship is useful when setting prices, with competitive bids, and when negotiating supplier contracts and accounts.

THE BALANCE IN PRODUCTS, SERVICES AND PROJECTS

The cost of every aspect of purchasing, producing, marketing, selling, delivering, tracking, or warranty work is part of the break-even calculations. Also included are ongoing costs like rent, utilities, insurance, debt payments, your salary and employee salaries, etc. Before starting new projects or services, calculate the total additional costs of doing them.

The break-even point and break-even range aspects show managers the impact of their decisions. The exercise of determining your break-even point for each product and service provides the foundation for maintaining and increasing profitability by setting prices to ensure competitiveness, adding new employees, allocating space in facilities, taking on or reducing debt, adding equipment, etc.

In purchasing, costs can be reduced by buying in bulk, negotiating prices/terms, or finding new suppliers. Revenue can be improved by increasing customer value or offering non-price concessions. It must be remembered that increasing profits simply by increasing margins is a risky strategy. Unless consumers perceive greater value, higher prices can have a negative impact on sales.

The customer ultimately decides the profit, value, and sales. When looking at breakeven points, it’s also helpful to look at fixed and variable costs. Fixed overhead costs are constant and can be accounted for quite accurately. Variable costs are not that simple to calculate, but in many industries variable costs follow certain percentages or ratios to make them easier to project.

It is also helpful to look at daily, weekly, monthly, and yearly break-even points. Many construction companies base their bids on when they break even for the year. Once that point is reached, they can make their bids more competitive to stay busy and profitable.

If you have employees or co-workers, it’s helpful to tell them the break-even numbers. By doing this, they can get a clear idea of ​​the expenses and what it really takes to run a business and show them that the business owners are not getting rich off the efforts of the employees.

THE BREAK-EVEN POINT IS AN INTEGRAL TOOL FOR PLANNING

When you know your break-even point for various aspects of your business, it can be a tool to help you plan for the future with a solid foundation. If you don’t know your break-even point, ask your accountant to show you. Some bookkeepers may add the breakeven point to their reports. If you think figuring out the obvious isn’t worth the trouble, consider how many companies have failed because they didn’t know their break-even point.

You’ll know exactly how much you’ll earn on each sale when you calculate your break-even point. You’ll also be able to project very accurately how many sales you need to make, what you need to do to achieve that level of sales, and even how much you can increase profitability by reducing expenses (add more efficient teams, reduce unproductive marketing). effort, etc.).

It even allows you to estimate profitability using economies of scale, i.e. paying less per product item by ordering more, lowering prices and thus increasing sales and accepting new lines or adding new services etc.

The breakeven point is a very underappreciated and underused tool. It should be part of every business plan because it is the basis for accurate decision making. But even if you keep your balance to yourself (and why let anyone know unless they have to), you will have a greater understanding of your own business.