The importance of knowing your break-even point

Breaking even is when ‘a business’ net income is zero and income is equal to outgoings’. It is the point at which your sales or revenues cover your expenses.

Something the dragons often go on about on Dragons Den is ‘knowing your numbers’. How much do you need to make to cover your business costs? Knowing your numbers is not only important for investment, but you need to know how much you need to sell to cover your outgoings and to set targets for growth.

Knowing your break-even point will allow you to make informed decisions about pricing, purchases and other factors that impact your bottom line.

Essentially your break even point should be your minimum target to obtain. When your business ‘breaks-even’ it means it hasn’t made a profit or a loss, but most people start businesses so they can make a profit.

Why is it so important?

  • It provides you with a target to cover your costs and make a profit.
  • If you are working a maximum capacity and not making a profit, then something is wrong. Going through your out-goings and incomings, or fixed costs and revenues will provide you with more in-depth knowledge of what is working well in your business.

Calculating your break even point

There are a number of great tools, formulas and explanations on how to do this. The one that I found most helpful was here:

Put simply, it’s total expense = variable costs + fixed costs

Variable costs may be expressed as the number of units sold times the variable cost per unit. Therefore,

Total expense = (units x variable cost per unit) + fixed costs

A book called Traction: Get a Grip on Your Business explains this process perfectly, except the author wants you to work to a 10 year plan. Highly recommended book for any business owner.

What goes wrong when you don’t know your break-even point?

If your business is failing to break-even it can lead to an accumulation of debt. You maybe able to continue trading for a period of time, but wait too long, and you may not be able to make payment on invoices due to suppliers.

A healthy cash-flow is essential to the success of a business, so ensuring that customers pay you on time is key. This is where Franklin James can support you.

To learn more, contact us today