One of the ways we can add wealth to our business is by increasing profit. Profit is defined as our revenue less our expenses. The point at which our profit is zero is called the Break-even point and it is useful to calculate. The Break-even Point tells us how many sales we need so that we don’t make a loss.
Here is the formula:
Break-even Point = Average month’s fixed running costs (Unit selling price – cost to produce one unit)
Our break-even Point is the number of “units” we need to sell so that we break even. A unit may be a product that the company sells or one hour of a service that the company provides.
Let’s have a look at an example.
Suppose that we have a bookkeeping business and we charge $50 per hour for our services. We pay our bookkeepers $20 per hour plus superannuation of 9.5%. The business has fixed running costs of $250 per month. How many hours service do we need to provide so that our revenue is equal to our expenses?
First let’s write out our variables:
Average month’s fixed running costs = $250
Unit selling price = $50
Cost to produce = $20 + 0.095*20
We can now calculate our break-even point.
Break-even Point = 250 / (50 – 21.9) = 8.9 units
Therefore we need to sell 9 hours of bookkeeping services before we can make a profit.
Cash-flow Forecasts and Break-even Points are two methods to help you to understand the health of your business so that you can make valuable business decisions. They are relatively quick and easy to calculate and can ensure that you can continue to make profits from your business.