The breakeven point for a business is of grave importance to financial people and should be of interest to business owners as well.
The breakeven is the amount of sales, which you need each year for your business to neither earn a profit nor incur a loss. We calculate this by figuring out your fixed costs and how much money you make on each of your products. Simple example — a convenience store has fixed costs each month of $10,000, this includes rent, insurance, salaries, etc. To make it even simpler, lets assume they sell only bread. If they buy bread for $1 and sell it for $2 then the store needs to sell 10,000 loaves of bread each month to break even. If they could increase their selling price to $3 the profit would be $2 a loaf and they would only need to sell 5,000 loaves. We would play around with this calculation asking questions. How many loaves could you sell at $2? How many could you sell at $3?
For service business we use hourly rates to do the calculations. If the monthly fixed costs are $10,000 and your hourly rate is $100, then you need 100 hours of work each month. If your hourly rate is $150 then you only need 67 hours a month to breakeven.
The point is to test the viability of the business. Can you sell enough products or services at a high enough price to breakeven?
Years ago in a workshop I was teaching, a man told me that he wished he had done this calculation before he started a business. He had been selling a low margin item; think T-shirts, in a high rent location. The amount of T-shirts he would have to sell to breakeven was not likely achievable. He had opened and closed the business the same summer. Doing the breakeven calculation would have encouraged him to either find products with higher margins or open in a lower rent district.
A business that does not breakeven is a hobby and there is nothing wrong with having hobbies, as long as you are not counting on your hobby to make your living.
No comments yet.