This is one of the most important numbers to have in your head, particularly if you’ve a lot of fixed overheads.
What is it?
Your breakeven point is the amount of sales at which you just cover all of your costs, including your dividends and corporation tax. It really is worth taking some time to get this calculation right and checking it regularly as it get become out of date really quickly.
What figures do you need to calculate it?
- What your fixed costs are – i.e. the overheads that don’t fluctuate depending on sales.
- An average gross margin
- All variable costs should be included your gross margin %
- Your monthly dividends
- If you have debt, the amount you pay including interest and capital repayments.
Break even is best done on a spreadsheet, as you need to play around with the sales figure to get to the bottom line break even. This is because corporation tax isn’t a fixed figure and changes every time your profit changes (remember dividends come out of taxed profit, so when you put your spreadsheet calculation together your corporation tax needs to be calculated on the net profit before dividends)
Using your break even
1) Divide your monthly breakeven by 4 to get the weekly figure, and use this in your flash report so you know if you’ve made a profit each week.
2) Use it as a yardstick for your business to understand what it takes to cover overhead and get into profit.
3) See the effect of taking on a new overhead, how much sales will need to increase by to cover it.
4) See how changes to pricing or product mix change the margin and therefore the sales needed.
5) Use it to see what efficiencies can be made to lower the break even sales. And just make sure you revisit it regularly to see if your overheads or average gross margin have changed.
If you always know your break even, then you’ll always know if you’re in profit or not, before you get your monthly accounts