What is “breakeven point”? The Breakeven point is an important and useful tool for business owners as they plan for future growth. It is basically the point at which your business “cost” equals your business “income”, there is no profit or loss. You should always know your breakeven point. It doesn’t matter if you are a new or old business, or if you are looking to expand, downsize, or looking for a bank loan. This is a great place to start when you want to know how your business is doing and where it can go in the future.
A breakeven point will show how much sales volume is needed to cover variable and fixed expenses. After your business reaches a breakeven, all gross profit after this point, will go straight to the improvement of the business’ bottom line. However, there are certain limitations for the use of a breakeven analysis. This is because it overlooks the importance of cash flow and makes the assumption that fixed and variable expenses will stay within the boundaries used to determine the breakeven. A sound business assessment will overcome these short comings.
How to calculate breakeven. Reviewing your annual financial statement is where you want to begin in order to understand fixed and variable expenses. Our Virtual CFO can assist you with your breakeven calculations.
* Fixed expenses generally vary in relation to sales volume. Some examples of fixed expenses are; rent, utilities, or insurance. These fixed expenses are not dependent upon your business income.
* Variable expenses examples are the cost of goods sold as well as things such as direct labor or sales commissions.
* Variable and fixed expenses. Some expenses seem to be both fixes and variable. You must use your good business judgment to determine how to split these expenses into reasonable proportions.
* Calculation. Divide fixed costs by your gross profit percentage to determine breakeven. For instance, a fixed cost of $10,000 and your gross profit percentage is 25%, your breakeven point is sales of $40,000 ($10,000 ÷ 25% = $40,000). Knowing selling price and variable costs allows you to compute gross profit percentage.
Do you need assistance calculating the breakeven point and evaluating the profit structure of your business? Contact our office at (260) 497-9761 to schedule an appointment with our advisors to see how we can get you on the right track. Utilizing modern technology our Virtual CFO has the capability to assist your virtually anywhere in the USA.