It might be surprising to note but not every business knows what it costs to open the doors each week and how much sales are required to meet all those costs. Often the variable costs are considered, however not absorbing, or understanding what fixed costs are and how much working capital may be required can be detrimental to your business especially in tougher business cycles.
Understanding your true break-even point not only determines business or product/service line viability but may also assist with appropriately pricing and quoting jobs to ensure that all costs are absorbed.
Costs that change as the quantity of the good or service that a business produces changes. For example: commissions/contractors, raw materials and freight.
Costs that are not dependent on the level of goods or services produced by the business. For example: rent, insurance, equipment, payroll, utilities and office expenses.
Fixed costs have the tendency to creep up over time and therefore a regular review of the break-even point and these fixed costs is also important. You may be able to negotiate with providers or seek out alternative quotes.
Below is an example of a simple break-even point:
It is important to note that every business is different and particularly with businesses providing services rather than products, it may be challenging to determine the variable costs where jobs may differ in pricing and scope. The above example assumes that variable costs for each job are no more than 25% of sales.
HLB has the tools and experience to work with you in determining and understanding the true break-even point for your business. The break-even point can be used as a starting guide, a benchmark figure for management reporting, a pricing tool, and a catalyst for business profit improvement strategies. We encourage you to give our team a call to discuss the break-even analysis for your business.
We would also recommend that the break-even figures be reviewed annually or at the time of any major business changes.
This article was published in the Winter edition of Client Alert. The article was authored by Jodie Lundy, Business Services manager at HLB Mann Judd Perth. For more information, contact Jodie on (08) 9227 7500.