The Importance of the Break-even Calculation
The term ‘break-even’ refers to the point at which the income covers the expenses. For example, you may have overhead expenses before you can even make a dime of profit. That might include rent, utilities, Internet, salaries and the like. Those expenses are considered General & Administrative or indirect costs.
Let’s say you are in the business of selling computers. Before you can sell a computer, you have to buy the computer. In fact, if you have a retail outlet that is regular bricks and mortar, you may have to buy a whole lot of computers. Those are considered inventory and although buying inventory may severely impact your cash flow, it won’t impact your break-even calculation at all.
What it does impact is the cost of the computer you do sell. So, let’s say you sell computers at $1,500 each and you buy them for $1,000. For every computer you sell, you make $500. Your regular monthly expenses are $1,000 per month. That’s the indirect costs.
Your break-even calculation will look like this:
Gross profit (per unit) $500
Indirect costs $1,000
You need to sell two computers a month to make your break-even number. ($1,000 indirect costs divided by $500 gross profit)
Companies frequently assign a dollar portion or percentage to cover the indirect costs so they can determine profitability on new products or services. That helps you target what’s working best, what’s likely to work in the future and whether it’s time to change up your model.
The bottomline of this post is the bottomline. An accurate and timely financial statement, and the support of people who can help you decipher it will help you quickly decide what’s working, what’s not and what needs to change.
Call Richard at 888-592-4769 to put our team of professionals on your side.
Tags:
