Working out when you break even

Do you know how much money you need to earn just to cover your basic running costs?  Do you know how many sales you need to make to earn that amount?

Well you should, and here's how to work  it out.
     

What's a break even sales figure

Your break even point is the income you need to earn to cover all your fixed and variable costs.  Any income you earn over and above the break even point is your profit.  If you don't reach your break even point you're running at a loss.

Once you know how much you need to sell to get into profit it'll give some focus to your sales efforts!


How to measure business costs

Every business has both fixed and variable costs it must cover to stay solvent. 

Fixed costs are sometimes called 'overheads' or 'indirect costs'. These don't change with the amount of sales you make or goods you produce.  Examples are office rent, web hosting charges, and business insurance.


Variable costs are sometimes called 'direct' costs. These vary in direct proportion to the amount of sales you make or goods you produce.  Examples are raw materials and sales commission.  You may need to take an average over 6 months if your sales levels fluctuate.


Monthly fixed costs + average monthly variable costs = TOTAL MONTHLY COSTS

Work out how many sales you need to cover your costs

Calculate the average value of each sale.  To do this add your total sales revenue for a month and divide it by the number of sales transactions. You may have to do this for a few months to get an idea of the average amount of money each sale generates.

Total monthly costs ÷ average sales revenue = the NUMBER OF SALES PER MONTH you need to reach break even point


      

What to do if you're not reaching break even point

DON'T lower your prices to try and sell more, here's some more effective things you can do:
  • Increase the number of sales you make
  • Increase the frequency with which customers purchase from you
  • Increase the amount of money each customer spends with you
  • Reduce your costs
  • Get some feedback using online market research
  • All of the above


Other business financial reporting tools

Profit and Loss Accounts

Balance Sheets

Break Even Analysis


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