Yesterday, I wrote a post entitled ” Are You Making This Mistake in Your Small Business” and I revealed to you a shameful mistake that I made and pointed out that I believe many small business owners do as well. Today, I want to talk to you about the main reason we do business. First of all, let me ask you a question, “Why are you in Business?” Now, I assume your answer is to make money or a make a profit. With that being said let me ask you another question and that is do you know how many units or services you need to sell to Break Even and eventually make a profit? If we agree that we are in business to make a profit then it is equally or even more important to know when the business will become profitable.
Let me tell you finding this number out for me and with my business has been the best thing that could have happened to me. Like I said in yesterday’s post they teach you this the first day in business school but I, like most of us, just pushed ahead because we are ambitious to make things happen and start our business. This is a mistake though because not knowing when the business is going to be profitable leads to the business failing. Knowing when you become profitable allows you to plan how much cash you will need to have on hand to stay afloat until the business can generate positive cash flow.
Going through this with my business has been a life saver. I know now exactly when I will start making money and can plan sales and lead conversion goals around the number of sales I need to make to be profitable. Before I just started each day doing random things that needed to get done and did not have a planned approach on how many sales calls and lead conversions I would need to make my monthly, quarterly, and yearly goals.
So how do you calcualte your Break Even point?
First, you need to figure out all your Fixed Costs (FC). These include line items such as, rent, marketing, salaries, utilities, operating costs, etc… These items are consistent month in and month out.
Next, you need to figure out your variable costs (materials). Typically this will be the cost of selling each product or the cost to produce.
Then you need to take the price of your product or the average selling price of all your products if you sell more then one and make an assumption of how many sales you can make in a time period. For this exercise let’s say a year.
Now multiply the total number of units times the price of the product to get the total sales.
Below you will see the equation
Total sales(TS) -(VC)=Gross Income
Then take your gross income and divide that by Total sales to get your gross margins
GI/TS
To find your Break Even point you then do the following step:
(FC)/Gross Margin
Here is an example:
FC 5422
VC 200
Product Price 19.95
Units sold 100
Total Sales 1995
Gross Income 1795
Gross Margin 90%
Break Even Sales 6026.95
BE Transactions 302
In this example you can see that my fixed costs are $5422 and variable costs are $200 (you base the VC on # of units sold so for this example I used 100 units and each unit costs me $2 to sell)
Then do all the other calculations and you get to the following result.
I need to sell 302 units at the current price to get a total sales of $6026.95. Once I hit that level everything else is going to be profit.
So, can you see how helpful it is to know your Break Even point. Listen, if you ever want financing or investors that is one of the first things that they are going to ask for.
Go figure yours out now and if you need help you can contact me.
Stay tuned for the next post where we talk about your “Score Card!”
To Your Success,
Coach Dave
