Establish Your Break Even Point To Set Goals And Targets

Seeing cash roll into your organisation throughout the tax year could see you breathing a sigh of relief as your business appears to flourish and to check that this is exactly the case it's recommended that you establish your break even point.

As you're sure to know, your firm will have to generate a certain amount of money before you're able to label income as net profit. In most circumstances it takes a lot or organising and significant investment and costs to keep businesses running. To turn them into an operational success, you're advised to perform some break even analysis.

Look at your costs

If you were to walk into any firm, you'd be able to see its assets, liabilities and costs. These can either be of the short or long-term variety and they are often considered by accountants when it comes to calculating your profits and losses. Breaking even is not often a goal of businesses as there is no profit attached to this status. Despite this, performing break even analysis acts as a kind of yardstick to the current success of your firm.

In order to calculate it, you or your accountant will need to know your fixed and variable costs. Fixed include outgoings that stay fairly constant, such as insurance payments and rent on properties your business uses. Conversely, variable costs are those that fluctuate as they depend on the materials needed and sales commission allocated to the products concerned.

Getting to the point

Basically, the break even point is established by working out how much each unit costs to produce, in regard to variable costs and fixed costs. So if you were in the market of selling smoothies and each one sold for £1 but 20p needed to go towards variable costs, you would have 80p left to pay off fixed costs. Let's say that the fixed costs amounted to £50,000, you'd have to sell £62,500 smoothies to break even.

From here, you'd be able to set goals and pinpoint when you need to push sales to prevent you making losses. This makes the data generated very valuable as you are able to keep tabs on how well your organisation is doing over your trading period. This allows you to set goals and targets, as well as earmark cash for potential investment.

Controlling break even

A popular technique to increase potential profits is to work on reducing your break even point, so you have a lower limit to reach. Reducing your costs is a good way to alter this point and you're free to work on both fixed and variable elements of your outgoings. You might want to target variable costs and seek out cheaper manufacturers for the materials you need to produce each unit, for example.

Labour is usually considered to be a variable cost as each production line is likely to need a different number of workers and experienced employees to complete tasks, so cost cutting here could involve investment in machinery. Rent, utilities and advertising are fixed costs and if it's possible to cut outgoings in these areas without affecting output then this ought to be a consideration. Another simple way to boost incomings is to simply increase your unit price, so each one can contribute more to lowering your fixed and variable costs, with even just a five per cent increase potentially accruing significant profits.