Do you know what the breakeven point of your business is? With so much uncertainty in the world at the moment, not to mention the world of business, it’s something you should figure out. This is important because you need to know how much money you need to make in order to be running a profitable business. Making a loss over a number of years will not help your finances and you’ll eat into your own money, or find yourself in more debt. How do you work out your breakeven point?
Work Out Your Breakeven Point
Your break even point is where the amount earned from your work is the exact same as the amount you pay out in order to be able to work. This includes bills, rent, licensing and costs for buying or creating your products to sell on, if this is relevant to your business. Let’s take a person called Tom who owns a fruit hamper service, as our example.
Tom’s fixed costs such as premises, bills, insurance and staff are £2000 a month. For the sake of example, he produces one type and size of fruit hamper. These hampers he makes cost him £5 to put together, all in. He sells them for £25. So making £20 per hamper, he would have to sell 100 hampers a month to break even. From that, Tom can determine how many hampers he needs to sell each week and every day. Anything on top of the break even number is profit.
Lower Your Breakeven Point
How can you lower your breakeven point so it’s easier to hit and hence, easier to make profit? The trinity of being able to do this is lowering your fixed expenses, cutting production costs or changing your prices. Of course, you could implement a mixture of all three. Perhaps you could find cheaper premises? Maybe you could buy a delivery van instead of hiring one? Could you find a new supplier or renegotiate your rate with your current one?
In our example above, if Tom is only selling online and doesn’t require a store front, does it matter where his business actually is? Moving site somewhere cheaper would help bring down the monthly expenses. As would renegotiating with his supplier now he’s been working with them for a while. Maybe Tom could also change the range of hampers he offers so people perhaps spend more with him? He could even introduce a recycled cardboard box hamper which would be cheaper for him to source and appeal to the eco-concious. How could you lower your breakeven point?
Recalculate To Include Your Investment
Perhaps you invested some of your own money into the business to get it off the ground? Maybe family or friends lent you some? However you funded the set up, you’re likely to want to pay that money back. If you haven’t incorporated that into your monthly breakeven price, you need to recalculate if you want to start paying it off.
If Tom borrows £1000 from his own savings in order to get his business off the ground and wants to repay himself, he needs to figure out how much he can pay himself per month. Let’s say he’s sold 150 hampers for the last three months and he’s likely to do the same again for the next year. That’s £3000 a month he’s earning. Let’s boost him break even point to £2100 for the next ten months so he can pay his savings £100 a month until he’s paid the full £100 back.
Work Your Business Magic
You know your business better than anyone. Whilst businesses often take time to start turning a profit, don’t be put off by the numbers. Invest in a bookkeeping service which actually adds value to your business. A bookkeeper can take the hassle out of the numbers, freeing your time up to focus on the part of the business you’re passionate about. Go work your business magic!