Do You Know When Your Company Has Broke Even?

pWe all know that the Breakeven Point in a business enterprise is when itrsquo;s not making a profit or losing money.nbsp; Sounds simple, right?nbsp; Well, can you tell me what your exact Breakeven Point is?nbsp; Probably not.nbsp; Most business owners either donrsquo;t know it or think they know it, with neither exactly knowing.nbsp; Breakeven can be expressed as a Dollar amount or Unit Sales, and once determined, you have a Target to reach through a carefully thought out a href=http://www.businessconsultingabc.com/Writing_An_Effective_Business_Plan.htmlBusiness Plan/a.nbsp; Without an established Breakeven Target, your a href=http://www.businessconsultingabc.com/Strategic_Plan_For_Business_Success.htmlStrategic Plan/a is floundering./p
p Increased sales donrsquo;t always equate into increase in profits. Many a business has gone out of business by ignoring the breakeven point, always thinking that increasing sales will lead to great profitability. More often than not, a companyrsquo;s variable costs, those costs that come directly nbsp;from a certain sales level, will get exponentially larger as the sales volume increases. Beware that not knowing a companyrsquo;s variable costs is often the hidden kiss of death./p
pWhen calculating the Breakeven Point, you will have to make certain assumptions and estimates.nbsp; Err on the side of conservative numbers by using more pessimistic sales and margin thresholds, while overstating your projected costs.nbsp; You want the Breakeven Point to be in the safe zone ndash; a worst case threshold. I will present some Breakeven formulas which are on the simple side, you can get very complicated with different Breakeven Formula variations. The point I am making here is providing some simple formulas you can quickly calculate your Breakeven and understand where you are presently and what it looks like projected. Once you have a handle on that, then maybe more sophisticated Breakeven Analysis is warranted and advantageous. Keep it simple to start./p
pstrongBreakeven Formula:/strongnbsp; S = FC + VC/p
pS = Breakeven point of sales in dollars/p
pFC = Fixed Costs in dollars/p
pVC = Variable Costs in dollars/p
pstrongemFixed Costs:/em/strongstrong /strongCosts that remain mostly constant despite what the Sales Volume may be.nbsp; Fixed Costs remain constant in a certain range, after which they change, particularly, after a steep increase in Sales (i.e.nbsp; you need a bigger building or more employees).nbsp; It is important to understand that these costs must be paid no matter whether the company makes sales or not.nbsp;/p
pFixed Costs include:/p
ul
liOverhead Costs:nbsp; Rent, Office / Administrative Costs, Salaries, Benefits, FICA and so forth./li
liInterest Charges:nbsp; For Term Loans and Mortgages./li
liHidden Costs:nbsp; Depreciation, Amortization and Interest./li
/ul
pstrongemVariable Costs:/em/strongnbsp; Costs directly associated with the Sales level and include:/p
ul
liCosts of Goods Sold/li
liVariable Labor Costs/li
liSales Commissions/li
/ul
pWhen you donrsquo;t know what your Variable Costs will be, you can use a variation on the Breakeven Formula, provided you know what your Gross Margin will be as a percent of Sales:/p
pS = FC divide; 1- (Variable Expenses*) divide; Sales/p
pstrong*: /strongnbsp;VE include Material Costs, Variable Operating Expenses and Variable Labor./p
pTo get Breakeven in Units Sold, divide the Breakeven Dollar Amount by the Unit Price./p
pstrongWhy is the Breakeven Analysis Important?/strong/p
ul
liYou can plan ahead and determine the amount of finance needed to grow the company./li
liBy graphing the Breakeven Analysis pictorially, it is much easier to make the Strategic Objectives more tangible and accomplishable./li
liYou can use the Breakeven Formula to measure your Companyrsquo;s progress toward Profit Goals.nbsp; It is a great tracking tool when graphed pictorially and can work in conjunction with your Strategic Planrsquo;s Milestone Goals. /li
liUnderstanding what your Breakeven Point is when setting Profit Goals through the formula:
ul
liS = FC divide; 1- ((Cost of Sales + Variable Operating Expenses) divide; Sales)/li
/ul
/li
liBreakeven Charts help your employees visualize your Companyrsquo;s progress toward profit goals./li
liOnce you know your Breakeven Sales level, then you can break that Sales Level down into the amount of Customers required./li
liPlug in three Sales Values (Best, Worst Case and Most Probable) to determine when your Fixed Costs will be covered.nbsp; This is invaluable when planning your Finance Requirements./li
liBreakeven Analysis is an excellent process to determine the effect of different unit costs for expected sales for each unit type.nbsp; Understanding which your most profitable units are, and how they relate to Breakeven and Profit Goals is the heart of your a href=http://www.businessconsultingabc.com/Developing_and_Writing_A_Winning_Marketing_Plan.html target=_blankMarketing Plan/a and Strategic and Sales Plan./li
/ul
pIf Breakeven Analysis is used as a tool to realistically understand Profit Projections and Profit Analysis, it is extremely effective.nbsp; A Business Owner and his/her Employees knowing on a day by day basis what it takes to breakeven for the month, quarter or the applicable period of time, is a powerful tool in realizing a Companyrsquo;s Profit Goals.nbsp; what is more, Breakeven Analysis is directly affected by a Companyrsquo;s Marketing Plan and vice versa.nbsp; The Company Strategic amp; Sales Plan is a realization of the breakeven Analysis.nbsp; When you think of it this way, Breakeven Analysis is at the core of planning and analysis necessary for Business Success.nbsp; It is a great tool, only if you use it!/p
pstrongAbout this Article Writer/strong/p
pFrank Goley is a business plan consultant, business consultant and business turnaround consultant for ABC Business Consulting. Frank is an expert in writing, developing and implementing business plans, business turnaround plans, business funding plans, marketing plans, strategic plans and web marketing plans. Frank offers comprehensive business consulting, business coaching, business turnaround consulting, along with web seo, web development and web marketing consulting, to small and medium size companies.. Frank is author of the business plan book, strongemThe Comprehensive Business Plan Workbook ndash; A Step by Step Guide to Effective Business Planning/em/strong, and he has over 50 published articles on business success strategies. He also writes the Business Success Strategies Blog./p