How to achieve financial mastery: knowing your break even

July 23, 2012

One of the most important numbers to know in business is your break even number.

This is the number that you need to hit to start achieving profits.  How you calculate the break even is to first add up all your fixed costs.  These are costs that are going to happen in your business no matter how much you sell.  For example, rent of the office, telephone, marketing costs, administration costs.  In my own business, labour is a fixed cost (although in some other businesses it is a variable costs i.e. it goes up and down with sales).

Once you add up all these fixed costs, you have your target.  You then have to work out how much money you are making on each sale, this is called your grofit profit.  Your gross profit is your sales less your costs associated with the sale.  So if you sell stationery, you would deduct the sale of the stationery from the sales price to your customer.  Other costs could be materials or labour.  Your gross profit should go up if your sales go up, and down if your sales go down.

Here’s where the break even comes in.

Your gross profit in the month has to be higher than your fixed costs to make a profit.

You can make it better for yourself and your profits by lowering your break even number.

You can do this by increasing your sales price or decreasing your variable costs or by decreasing your fixed costs.  All of these will mean lower break even number which means higher profits.

One thing I personally like to track is what stage of the month do we cross over between making a loss and making a profit (you could do this weekly) and announcing the point that we go over (for added fun).  This will (hopefully) motivate your team to keep going to increase the profit.


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