One of the questions we get asked a lot is how to work out people’s breakeven points. It’s not black magic; it’s actually something that’s relatively simple to work out.
You can do it historically looking at last year’s figures, or last month’s figures of last quarter’s figures. Or you can go forward using budgets, that the process is exactly the same.
This is the process using historical figures:
- Track down the Profit and Loss Statement from your financials
- Determine total expenses from this report (don’t include Cost of Sales in this figure)
- Add on to that any loan payments that you’ve got for equipment finance or car loans or bank loans
- Deduct any amortization, any depreciation and any interest on those loans that we’ve got the costs on. (these are generally the accountants adjustments at ear end)
- The next step is to determine what your gross profit needs to be to breakeven. Gross profit is sales, less the expenses you need to make these sales. (It’s usually listed in your Trading Statement or in your Profit and Loss Statement).
- Next, work it out as a percentage. For Example: we’ve got sales of 100,000, our cost of sales for our manufacturing business is materials and supplies of $40,000, then that means our gross profit has to be $60,000. Divide $60000/$100000 and your Gross Profit % is 60%
- Once we know our gross profit is 60%, we need to divide our total expenses that we got above (including loans) by our Profit Margin, our 60%. That will then tell us what our sales need to be to breakeven.
Of course, breaking even isn’t the aim of the game. We want to make sure that we’ve got wages for you and profits for you in the process so you can work it out including them.
MY suggestions to you is first work out a breakeven calculation without profit, and then go back, do the same calculation, but add back into those expenses, what profit amount you want, and what amount of wages you want for yourself, and then work backwards to work out what your sales needs to be for your breakeven.
If you need help, reach out.