Do you know your break even point? If you are an aspiring business owner then you will likely skim over the title of this article and think ‘that’s not for me, I want to make money, not break even’. But knowing what your break even looks like can be a useful tool for businesses. Put simply, without knowing your break even point, it’s impossible to know what you need to look out for in your month-end figures to determine when you’ve had a good month, and when you need to improve things.
Read on to find out how to calculate your break even as a small business owner, and how finding your break even can help your personal life, too.
Why knowing your break even is important?
The answer is simple, when you know your break even point, you can use this to benchmark your performance.
It also gives you a point of reference when you are setting targets and measuring against them. One bad month where you miss your targets but don’t fall short of your break even, won’t kill your business but performing close to the break even point on a regular basis should trigger some changes to make sure that your business is successful long term.
Calculating your break even also gives you a reality check. If you have high fixed costs as you set out on your business journey, aiming for sky-high revenues might be unrealistic and
demotivating for your team. Setting an attainable growth target here would be a more productive and attainable way to grow your business.
Calculating break even
So, now you know what a break even is and how it can be useful to your business, we’re going to show you how to figure yours out. The good news is that the calculation is easy:
(Revenue – Variable Costs)
The Calculation: The fixed costs go at the top as they are immovable and give you your starting point. The variable costs are then deducted from the revenue to show how much money is left. Then you divide the fixed costs by the figure at the bottom to work out your break even.
Fixed Costs: Costs that don’t change, or change very little, month-to-month. These include your business rent, salaries and equipment costs.
Variable Costs: Variable costs change month-to-month. That building repair you needed? That’s a variable cost. Buying lunch for a client meeting? That would go in the variable cost bracket, too. You likely don’t buy the same lunch for the same client every single month and you won’t need to keep on repeating the same repair to your building – these are costs that fall outside of the fixed costs bracket but still need to be deducted from your revenue at the end of the month to find that all important break even. It is important to be thorough when looking at your variable costs as we will talk about later.
The break-even point is when the sum of your fixed and variable costs are equal to your revenue.
The benefits of knowing your break even
There are four key benefits to knowing your break even:
Setting meaningful goals: As we’ve touched on earlier in this article, knowing your break even point means that you can set meaningful, achievable targets to ensure that your business is always in a position to grow.
Identify risks: Your break even should also give you a guide as to when a business risk is worth taking and when, perhaps, it is best to play safe. Don’t take risks when you know it might compromise your break even point for the month.
Hidden Costs: Some variable costs can be sneaky but keeping track of all your variable costs means that nothing goes unnoticed. It also helps you to factor in the impact of every decision your business takes along the journey to success and helps you filter out the not-so-essential extras.
Competitive Pricing: It is easy to look at your competitors when benchmarking where your price point should be, but it’s also important to look inwards, at the impact a price will have on your business. Knowing where your break even point lies gives you the opportunity to price smartly, attracting customers and maximising that all-important revenue.
Break even in your personal life too
At d&k Accounting, we aspire to help people not only with their business finances, but with their personal finances too. It is important to make sure that the money from the business is enough to cover your personal finances.
To work out your personal break even, you need to look at what you need to be earning to make sure personal and household bills are covered. With the above formula, find the point where your total revenue and the amount of personal bills cross. This is your personal breakeven point – see the below chart to get a more graphic view of what a personal and business break even are.
Creating your own personal budget is a great way to balance all of life’s essentials whilst creating a happy life that you can afford. Knowing the break even point in your personal finances can help you set a realistic savings goal each month, keeping your finances in good shape.
Knowing what both your business and personal break even points are each month, can really help you grow your business. Remember that this should be done each quarter, to take into account changes within the business and your personal life.
Please speak to your accountant or a financial advisor if you need advice on the subject of finding your break even point.
You can call us for advice on 01302 613 515 or email firstname.lastname@example.org.