Is Your Business Profitable? Know Your Break Even Point

A number one rule for business is to know your break even point when it comes to profitability. Many business owners pay a lot of attention to their profitability instead putting some focus on their break even point. To tell if your business is profitable look at your break even point and your break even margin. When you know your break even point on certain services, products and overall business operations, it's the key to strategic planning, maintaining and increasing profitability in the long run.

The break-even point is defined as the point where sales or revenues equal expenses. There is no profit made or loss incurred at the break-even point. This figure is important for anyone that manages a business since the break-even point is the lower limit of profit when setting prices and determining margins. Obviously the break-even point becomes very important when calculating a strategy for net profit.

If you are a business owner with a home office or you hav! e a business with many employees, your break even point includes the total cost of running your business and the amount that you pay yourself as a salary. An important key to your overall operation is your salary, without it you could not afford to keep running your business. Your salary should not be considered profit but include it in the break even analysis. Profit is the difference between the break-even point and the amount you charge for products or services.

Also look at the break-even margin, which is a ratio that shows the gross-margin factor for a break-even condition. The formula is total expenses divided by net revenues multiplied by 100 to get a percentage. This ratio is helpful when setting prices, with competitive bidding and when negotiating contracts with vendors and accounts.

THE BREAK-EVEN ON PRODUCTS, SERVICES AND PROJECTS

The cost of every aspect of purchasing, producing, marketing, selling, delivering, providing follow-up or warranty ! work is part of the break-even calculations. Also included is ! on going costs like rent, utilities, insurance, debt payments, your salary and employee salaries etc... Before you start new projects or services, calculate your total added costs for doing them.

The aspects of the break-even point and the break-even margin show managers the impact of their decisions. The exercise of determining your break-even point for every product and service provides the basis for maintaining and increasing profitability by setting prices to assure competitiveness, adding new employees, allocating facility space, taking on or reducing debt, adding equipment, etc.

In purchasing, costs can be lowered by bulk purchasing, negotiating price/ terms or finding new suppliers. Revenues can be improved by increasing value to the customer or offering non-price concessions. It must be remembered that increasing profits by simply increasing margins is a risky strategy. Unless the consumer perceives higher value, increased prices may negatively impact sales.

The customer ultimately decides benefit, value and sales. When looking at break-evens it is also helpful to look at fixed and variable costs. Fixed overhead is steady and can be factored in quite accurately. Variable costs are not as simple to calculate but in many industries variable costs follow certain percentages or ratios so they are easier to project.

It is also helpful to look at break-evens on a daily, weekly, monthly and yearly basis. Many construction companies base their bids on when they hit their yearly break-even. Once that point is reached they can make their bidding more competitive to stay busy and profitable.

If you have employees or co-workers it is helpful to let them know the break even figures. By doing this they can have a clear picture of expenses & what it acutally takes to run a business & show them that the business owners aren't getting rich off of the employees efforts.

THE BREAK-EVEN POINT IS A COMPREHENSIVE TOOL FOR PLANNIN! G

When you know your break-even point for various aspect! s of you r business it can be a tool that helps to plan for the future with a solid foundation. If you do not know your break-even point ask your accountant to show you. Some bookkeepers are able to add the break-even point to their reports. If you think finding out the obvious is not worth the effort, just consider how many businesses have failed because they did not know their break-even point.

You'll know exactly how much you'll make with every sale, when you calculate your break-even point. Also you'll be able to very accurately project how many sales you need to make, what you need to do to achieve that level of sales, and even how much you can increase profitability by cutting expenses (adding more efficient equipment, cutting unproductive marketing efforts, etc...).

It even allows you to estimate profitability by utilizing economies of scale--i.e., paying less per item of product by ordering more, reducing prices and thereby increasing sales and taking on new lines! or adding new services and so on.

The break-even point is a greatly undervalued and underutilized tool. It should be part of every business plan because it is the foundation for accurate decision making. But even if you keep your break-even point to yourself (and why let anyone know unless necessary), you'll have a greater understanding of your own business.

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