Buisness plans and Cashflow forecasts,Budgeting ,Finance advice, Bright Ideas Group,
Buisness plans and Cashflow forecasts,Budgeting ,Finance advice, Bright Ideas Group,
Buisness plans and Cashflow forecasts,Budgeting ,Finance advice, Bright Ideas Group,
Buisness plans and Cashflow forecasts,Budgeting ,Finance advice, Bright Ideas Group,
Buisness plans and Cashflow forecasts,Budgeting ,Finance advice, Bright Ideas Group,
 

 

Break Even: Possibly the simplest precaution for avoiding business failure.

The straightforward break even equation is: Break even point = Fixed Costs/(Unit Selling Price - Variable Costs)

This break even calculation shows you at what level of sales your business makes a profit.  This powerful insight can help propel your business toward profit, yet distressingly, a vast majority of businesses don’t know their break even point.

Top break even insights

  • One of the top reasons why business fail is that they spend way too much money on fixed assets too soon
  • It’s critical to work out your break even point to determine:
    • How many product/service units must be sold to cover all the cost and expenses to manufacture them
    • The lowest amount of business activity necessary to prevent losses.
  • Load you break even point into your cash flow forecast to immediately give you a strong indication of the financial position of your business.

Call Karyn on 021 66 7373 to identify your breakeven point

Break even point explained:

  • If you’ve reached your break even point:
    • Your total sales or revenues equal your total expenses NB there is no profit made or loss incurred.
  • If you’re above your break even point
    • Every additional unit sold increases your profit by the amount of your sales price less your variable costs.
  • If you’re below your break even point, you can:
    • Reduce fixed costs (e.g. by renegotiating rent, telephone bills etc)
    • Reduce variable costs (e.g. by finding new suppliers etc)
    • Increase the selling price of your product/service.

Case Study:
A well known Auckland Restaurant (whom I’ll refer to as Foodies to protect their privacy) recently came to see Bright Ideas Group in a crisis. They were ‘flat stick’ busy, making lots of money but struggling with cash flow and just not seeming to be able to get ahead. Ironically what was discovered once their break even point was calculated was that their hire purchases were too high and severely draining money from their business. Once they saw specifically where their money was disappearing to, they were able to renegotiate their hire purchases, consolidate their debts and start to retain some profit without having to increase their selling price a single cent.

3 crucial lessons

  • You need to know all the costs and expenses that go into producing your product or service
  • There are distinctive and important differences between being busy and making money with making money to retain in your business
  • Know your money ‘enemy’ and fight an educated fight. The solution is not always increasing your price.

6 break even point limitations:

    • Some businesses start to focus solely on break even point rather than focusing on growth
    • It’s best suited to analysis of one product at a time
    • It analyses costs only - it tells you nothing about what sales are actually likely to be at various prices
    • It assumes that costs are constant (e.g. an increase in the scale of production is likely to cause fixed costs to rise)
    • It may be difficult to classify a cost as all fixed or all variable
    • It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e. there is no change in the quantity of goods held in inventory at the beginning and the end of the period)