How to calculate your break even point – in 2 simple steps

Wouldn’t it be good if you had a rule of thumb to analyse every expense in your business.

Imagine being able to make critical decisions on whether you can afford another staff member or whether you should buy that new machine, based on a simple calculation.

There is a way!

Breakeven Analysis is one of the simplest ways to analyse key areas of your business.  It works like this…..

Your business has variable and fixed costs. Variable costs are those that increase or decrease in line with your sales. Examples of these include Cost of Goods Sold and direct labour. Fixed costs are those costs that will be incurred whether you sell $1 or $1 Million. Examples of fixed costs are rent and administrative wages.

Every time you sell say $100, you incur variable costs, let’s say $45. This means that you make a margin of $55 or 55%. If your fixed costs in your business are $200,000 pa, how much do you need to sell to break even?

$200,000????  NO!

All you need to do is divide your fixed costs by your margin. In the example above this means $200,000 divided by 55% meaning you would have to sell $363,636 to break even.

If you are looking at increasing your fixed costs, say adding a receptionist on a wage of $30,000, you will need to make an additional $54,545 in sales, just to maintain the same level of profitability.

Every financial decision in your business can utilise breakeven. All you need to know is your margin and your fixed costs. The rest is easy!!!

As business advisors we pride ourselves on making the complex simple for you. Running a business is hard enough without being bamboozled by complex accounting concepts – give Altitude Advisory a call on 81721444 to speak directly to a Business Advisor today. All our advisors are qualified accountants and share one goal – to enable you to run a better business.