Your breakeven point is the financial milestone at which your income covers all business costs, marking the threshold where any earnings beyond this point contribute to profit. In essence, it is the minimum sales required to keep your business both profitable and viable.
Pairing this comprehension of the breakeven point with detailed financial reporting from your accounting software is invaluable. This approach provides crucial data for analyzing fixed and variable costs, allowing you to set meaningful sales targets for the business or individual team members.
Differentiating Fixed and Variable Costs:
Understanding fixed and variable costs is essential in this context:
Fixed costs: These remain constant, irrespective of sales volume, encompassing expenses like rent, equipment leases, or full-time staff salaries—commonly referred to as overheads.
Variable expenses: These fluctuate with sales and include costs such as production labor, cost of goods sold, and commissions paid to salespeople.
Calculating a percentage of variable costs compared to the sale price aids in determining the breakeven point. While initial figures may be approximate, ongoing analysis of financial reports enables refinement and adjustment of selling prices accordingly.
How to Calculate Your Breakeven Point:
Accurate breakeven point calculation involves knowing your fixed costs, selling price, and production costs. A common method is:
Overheads / (selling price – production cost)
For example, with overheads at £10,000 per month, selling a coaching program for £1,500 with variable costs of £750 per program yields a breakeven point of 13.33 programs or £20,000 worth of sales per month.
Benefits of Understanding Your Breakeven Point:
Understanding fixed and variable costs provides clarity on the minimum revenue required to sustain your business and its impact on your financial position. Once armed with a reasonably accurate breakeven figure, you can swiftly calculate profit before tax for sales exceeding this point.
For instance, if variable costs per program are £750 and you sell 20 programs monthly, you generate an extra £5,000 in profit (before tax) after covering overheads and variable costs.
Can Breakeven Help with Pricing?
Certainly. Awareness of your breakeven point offers deep insights into your pricing strategy. High variable costs may prompt a reassessment of pricing to cover expenses adequately. It allows you to determine fair prices for consumers while ensuring the financial sustainability of your business.
Talk to Us About Calculating Your Breakeven Point:
Calculating your breakeven point is a strategic step to confirm your business's viability and set optimal pricing for both sales and profitability. We're eager to help you delve into your business financials, ensuring long-term sustainability, enjoyment, and profitability. Reach out to discuss your breakeven point, and let's embark on this journey together.