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Knowing your break-even point can make or break your business.

In the past ten years, I have witnessed business operators who are completely across all facets of their business, that is, they continually measure their results and performance correctly, have tight controls in place and basically account for every cent.
But, unfortunately, there have been many more instances where operators don’t have any kind of management information in place to help guide them. Why? They don’t want to account for revenues and costs correctly, or they don’t see the value of such consistent close scrutiny.

Either way, not keeping accurate records of margins and money flows of their business often means they have not established a break-even point, which can lead to poor decision making and consequently, reduced business value and ultimate selling price. Of course, many understand that increased cashflow doesn’t necessarily mean increased profits when a business is growing rapidly. But what’s not clear is the understanding of naturally increasing break-even points in the business, due to variable-cost, and some fixed-cost, increases, which don’t necessarily remain static. This is evident when a business has operated for many years successfully, followed by a sustained reduction in sales revenue for various reasons. What follows are cashflow shortfalls and reduced profits as the business slips below its break-even point.

What’s the solution? Know what your variable costs are per each unit of service/product you sell: things like production wages, raw material costs, advertising, freight and more. From this you can establish what your gross margin contribution is from each sale you make. On top of this, know your fixed costs: things like rent, administration, lease payments, insurance, IT and more. When total sales revenue (X amount of units) becomes greater than fixed costs plus variable costs, then that’s your break-even point or, in other words, that’s the number of unit sales/ revenue required to start making a profit. It’s easy to “Google” and download a break-even analysis template (there are plenty available on-line) or simply ask your accountant about the same.

Success in small business is knowing where you are now, before you act, and making strategic decisions.