Do you know what your break even figure is?

The Importance of Knowing Your Figures

During a past due diligence interview for the purchase of my company, I was asked about my companies’ figures. At the time, I knew the basics, but it wasn’t enough. Something the dragons often go on about on “Dragons Den” is knowing your numbers. Knowing them is not only important for investment, but you need to know how much you need to earn to cover your outgoings and set targets for growth.

How can you plan when you don’t know what you are earning or what your outgoings are?

What is a break even figure?

The break even figure is the point at which your sales or revenues cover your expenses. Essentially your break even point should be your minimum target to obtain.

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:

Basically 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

The figures and words above at first made me squint! So, when I started my first company I devised a simple spreadsheet that listed all my outgoings and expenses.

I then worked out what my sales target should be to achieve the total outgoings figure (break even).

So, let’s say that my first year outgoings and expenses were £4000 per month including a wage, I knew that figure would be my minimum target.

I listed the dates that payments were due out of my bank and the sales that were due in. I did this so that I could work out my cash flow for the month, to make sure that I wasn’t spending more than I was earning.

It’s basic, but everyone should at least do this.

When you start spending more than you are earning, getting into debt then comes into play.

I wrote down everything I wanted that required money or time for my end goal for a 5 year plan. Then I worked my targets backwards until I had my first year sales target and outgoings.

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.

My point here, which ever way you choose to learn your break even figure, do it. It’s life changing just knowing that simple figure and being able to set a simple target for yourself.