Today’s four calling birds challenge takes us back to your profit and loss statement to calculate your break-even point.
This is a metric most business owners overlook or assume is irrelevant if they are making a profit (which in some cases is true). But with increasing costs of sale, declining margins and increased fixed costs, the gap between you sales and break-even point can narrow at an alarming rate.
It is always sensible to keep an eye on exactly where your break-even point lies.
The equation for calculating your break-even sales value is:
Fixed costs/Gross margin percentage
It is important to remember the rules about calculating both of these numbers as we discussed on Day . Gross profit is the amount you earn after all your direct and variable costs and is the amount of each sale that you get to ‘keep’ in your business to contribute towards your overheads and your profit.
Your Gross Margin Percentage is this number expressed as a percentage. It is important to get as accurate as possible with this number, and add into it all the costs that are ‘spent’ when you make sales. In the best case, this would include your marketing costs. It will also include all sub contracted costs that you only incur when you make a sale.
So, for instance, if you had a sub-contract worker who you only paid when they carried some work for you, then you’d include those costs in your Gross Margin Percentage. Be careful here. If your worker is on the payroll and you had to pay them regardless of how much you sold, then their costs would be included in salaries which are a fixed cost.
Here is a graph and an example that shows the calculation of your break-even point in number of sales units. By replacing the denominator in the equation with your gross margin percentage (as above) you’ll calculate your break-even point in terms of sales value.
As always if you need help to calculate any of these metrics in your business just drop me a line by email.