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Understanding your break-even point

13.09.2019 by Haley Bilston

Do you know what the break-even point is for your business? Your break-even point is the level of income needed to cover your costs.

If your business is well-established, you may already have a good gut-feel for your break-even point. However if you are new to business, or if there are some major changes going on in your business, it can be valuable to work out your break-even point so that you understand the level of income your business needs to cover costs as a minimum.

It can be very useful to know your break-even point on a cash basis, so that you know the amount of sales needed to cover not only your operating expenses, but also the principal portion of any debt repayments. This is particularly important if you are looking to purchase the business, and it could potentially be used as a tool in the negotiation of the purchase price.

The break-even point can be calculated on an annual basis, and then broken down into the monthly, weekly and even the daily level of sales needed to break-even.

You can go one step further and then break this down between your team members, to understand for example the level of sales needed for each sales person in a retail business, or the number of chargeable hours needed for each tradesperson in a contracting business.

You can lower your break-even point by of course reducing your outgoings. This may be a combination of:

- Sourcing better deals from your suppliers, and

- Reviewing your expenses and cutting those that are no longer necessary or adding value to your business.

Where you have direct costs on jobs (such as materials and cost of goods sold), you can also lower your break-even point by improving your gross profit margin, through:

- Looking for opportunities for better pricing of your products or services, and

- Reviewing your product lines to see if you may need to discontinue some, or introduce others.

If you would like help understanding the break-even point of your business, and understanding how you can influence this, please give us a call.

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Topics Business Improvement, Business Planning

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