What Do I Need To Break Even?
Whether you’re in the early days of running a business or your business has been significantly impacted by the coronavirus pandemic, knowing what you need to do to break even is essential to keep your business afloat.
Breaking even means your total costs and total revenues are equal – your business isn’t making a loss, but on the flip side it isn’t making profit either. While for business owners the name of the game is making a profit in normal times, given the current climate, breaking even may be the best we can hope for at the moment.
Finding your break even point
To understand precisely where this point is, and what you need to do to get there, it’s vital to know how much cash you have coming into and going out of your business. In this case, a cash flow forecast is a powerful weapon to have in your business finance arsenal.
As a business owner you should ask yourself – what is the minimum level of sales required to cover all my costs? Understanding the minimum sales required can help you avoid your business making a loss.
To establish your break even point you’ll also want to look at fixed and variable costs. Fixed costs are things like rent, salaries and insurance (costs that don’t fluctuate much), whereas variable costs are more likely to be materials, supplies and sales commission. Once you know what your costs are, you’ll then want to forecast your revenue.
For a manufacturing company, like Alison Grieve’s G-Hold for example, Alison calculates her revenue by multiplying the price of a product by the number of units sold. Or for other types of businesses, such as agencies, it could involve looking at your sales pipeline and how much money you’re expecting in from existing retainers and one-off projects.
Once you know your total costs and your total revenue, you’ll have a good idea of what the break even point is for your business. Simple, right?
But wait, there’s more.
The limitations of break even analysis
Traditional break even analysis does indeed have limitations. The calculation doesn’t take into account external factors, such as fluctuations in the market, shrinking demand or even an economic recession. It also doesn’t factor in specifically when people will pay you.
So how can you plan for business not-quite as usual?
We’d recommend you use a scenario planning tool, like the one we have in Float. This will take your real cash flow forecast and let you build in potential ‘what if’ situations to see how it affects the figures.
For example, what if there are further local or nationwide lockdowns? What if you have to close your business for a period of time? Or what if some of your workforce are off sick? Would these scenarios result in a loss of sales and in theory move the needle on the point where your business breaks even? It’s highly likely.
Once you’ve mapped out any potential scenarios, you can start planning for how you’ll deal with each situation, should it arise. You might dip into your cash savings to bring your business back up to break even point, or you could take a closer look at any overspending in your company. Whether it’s cutting costs or increasing your cash inflow with a grant or loan, you’ll be in the best position to take an educated approach and move your business forward with confidence.
Want to work out your break even point today? Set up a cash flow forecast for free and try out a trial of Float.