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pWe all know that the Breakeven Point in a business is when itrsquo;s not making a profit or losing money.nbsp; Sounds simple, right?nbsp; Well, can you tell me what your exact Breakeven Point is?nbsp; likely not.nbsp; Most business owners either donrsquo;t know it or think they know it, with neither exactly knowing.nbsp; Breakeven can be expressed as a Dollar amount or Unit Sales, and once determined, you have a Target to reach through a carefully thought out a href=http://www.businessconsultingabc.com/Writing_An_Effective_Business_Plan.htmlBusiness Plan/a.nbsp; Without an established Breakeven Target, your a href=http://www.businessconsultingabc.com/Strategic_Plan_For_Business_Success.htmlStrategic Plan/a is floundering./p
pIt is very important to understand that increased Sales do not always translate into increased Profits.nbsp; Many companies have gone out of business by ignoring the importance of Breakeven Analysis, thinking increased Sales will lead to certain Profitability.nbsp; Unfortunately, more oft than not, the companyrsquo;s Variable Costs, or those directly derived from sales levels, get exponentially larger as Sales Volume Grows.nbsp; Not knowing the Variable Costs is a silent killer for many companies./p
p You have to make certain assumptions when calculating a companyrsquo;s breakeven point. Better to use conservative numbers by using more conservative sales volumes and margins, while overstating projected costs. You definitely want the breakeven number to be in the safe zone, which is a worst case scenario. Below are some breakeven formulas which are the simple version to get you started. Breakeven formulas can get very complicated. Stick to the basics to get a good understanding, then consider doing the more complicated calculations. Here are some simple formulas so you can quickly figure your breakeven today and where you are heading in the future. Keep it simple to start./p
pstrongBreakeven Formula:/strongnbsp; S = FC + VC/p
pS = Breakeven point of sales in dollars/p
pFC = Fixed Costs in dollars/p
pVC = Variable Costs in dollars/p
pstrongemFixed Costs:/em/strongstrong /strongCosts that remain largely constant despite what the Sales Volume may be.nbsp; Fixed Costs remain constant in a certain range, after which they change, particularly, after a steep increase in Sales (i.e.nbsp; you need a bigger building or more employees).nbsp; It is important to understand that these costs must be paid no matter whether the company makes sales or not.nbsp;/p
pFixed Costs include:/p
ul
liOverhead Costs:nbsp; Rent, Office / Administrative Costs, Salaries, Benefits, FICA and so forth./li
liInterest Charges:nbsp; For Term Loans and Mortgages./li
liHidden Costs:nbsp; Depreciation, Amortization and Interest./li
/ul
pstrongemVariable Costs:/em/strongnbsp; Costs directly associated with the Sales level and include:/p
ul
liCosts of Goods Sold/li
liVariable Labor Costs/li
liSales Commissions/li
/ul
pWhen you donrsquo;t know what your Variable Costs will be, you can use a variation on the Breakeven Formula, provided you know what your Gross Margin will be as a percent of Sales:/p
pS = FC divide; 1- (Variable Expenses*) divide; Sales/p
pstrong*: /strongnbsp;VE include Material Costs, Variable Operating Expenses and Variable Labor./p
pTo get Breakeven in Units Sold, divide the Breakeven Dollar Amount by the Unit Price./p
pstrongWhy is the Breakeven Analysis Important?/strong/p
ul
liYou can plan ahead and determine the amount of finance needed to grow the company./li
liBy graphing the Breakeven Analysis pictorially, it is much easier to make the Strategic Objectives more tangible and realizable./li
liYou can use the Breakeven Formula to measure your Companyrsquo;s progress toward Profit Goals.nbsp; It is a great tracking tool when graphed pictorially and can work in conjunction with your Strategic Planrsquo;s Milestone Goals. /li
liUnderstanding what your Breakeven Point is when setting Profit Goals through the formula:
ul
liS = FC divide; 1- ((Cost of Sales + Variable Operating Expenses) divide; Sales)/li
/ul
/li
liBreakeven Charts help your employees visualize your Companyrsquo;s progress toward profit goals./li
liOnce you know your Breakeven Sales level, then you can break that Sales Level down into the amount of Customers required./li
liPlug in three Sales Values (Best, Worst Case and Most Probable) to determine when your Fixed Costs will be covered.nbsp; This is invaluable when planning your Finance Requirements./li
liBreakeven Analysis is an excellent process to determine the effect of different unit costs for plausible sales for each unit type.nbsp; Understanding which your most profitable units are, and how they relate to Breakeven and Profit Goals is the heart of your a href=http://www.businessconsultingabc.com/Developing_and_Writing_A_Winning_Marketing_Plan.html target=_blankMarketing Plan/a and Strategic and Sales Plan./li
/ul
pIf Breakeven Analysis is used as a tool to realistically understand Profit Projections and Profit Analysis, it is extremely effective.nbsp; A Business Owner and his/her Employees knowing on a day-to-day basis what it takes to breakeven for the month, quarter or the applicable period of time, is a powerful tool in realizing a Companyrsquo;s Profit Goals.nbsp; what is more, Breakeven Analysis is directly affected by a Companyrsquo;s Marketing Plan and vice versa.nbsp; The Company Strategic amp; Sales Plan is a realization of the breakeven Analysis.nbsp; When you think of it this way, Breakeven Analysis is at the core of planning and analysis necessary for Business Success.nbsp; It is a great tool, only if you use it!/p
pstrongAbout this Article Author/strong/p
p Frank Goley is a business plan consultant, business consultant, and business turnaround consultant for ABC Business Consulting, and he has been helping companies to succeed for many years. He is an expert in developing business plans, marketing plans, funding plans, strategic plans, turnaround plans, web marketing strategies,nbsp;and project specific business plans. Frank is also a business coach and a web development, web marketing and web seo consultant. Frank is author of the business plan book, strongemThe Comprehensive Business Plan Workbook ndash; A Step by Step Guide to Effective Business Planning/em/strong, and he has over 50 published articles on business success strategies. He also writes the Business Success Strategies Blog./p