When do you start working for yourself?
You run your own business, but when do you actually start working for yourself? When do you stop working to earn money for your business and start working to earn money for you?
At what point in the week or month do you break even?
Breaking even is the point at which your business covers its costs (making no profit or loss). It’s extremely useful and often overlooked by businesses once out of the start up phase.
So how do you calculate break even?
Overheads (or fixed costs) divided by Gross Profit % = Breakeven Sales.
You can calculate the breakeven point for each day, week or month depending on how your business operates. Doing it gives instant meaning to your sales numbers.
It goes without saying, the earlier in the trading period you break even the better. If you currently break even at 12pm on a Friday, you either need an incredible Friday afternoon or you need to do something to break even earlier in the week.
There are two ways to improve your break-even point: Increase gross profit, or reduce overheads.
3 simple routes to increasing your gross profit:
1. Reduce your cost of sales – increases your gross profit on every sale.
2. Increase your prices – adds gross profit whilst your cost of sales remain the same.
3. Don’t discount – increases profit, as discounts reduce profit & increase break even.
For more detail on how to improve gross profit have a look at a previous post here.
Reducing the costs your gross profit has to cover each month improves your break-even point. Proactively managing your overheads should always be part of your management strategy. However, reducing your overheads – often the first place business owners go to improve profitability- will not give you the same results as reducing your cost of sales.
Why? Three reasons:
1. The improvements will typically be small – Typical overheads are salaries, rent and vehicle payments. Whilst you can make some improvements they will generally be small. How will your landlord react when you ask him to give you a 5% discount on rent as you are trying to improve your breakeven point?
2. Frequency – Most of your overheads are paid once a month or once a quarter so you will only realise the benefits once a month/quarter as you pay them.
3. Time – A large proportion of overheads can only be reviewed and renegotiated once a year, every three years or perhaps longer in the case of leases on premises.
So, be conservative and only spend what you absolutely have to. When you do, negotiate hard and get the best deal possible and then review and renegotiate as soon as you can.
Any overhead cost that you sign up for gets paid before you do!
3 Ways to use Breakeven in your business this week
1. Minimum performance
Breakeven represents the minimum performance for you and your business each day, week, month or year. Until you hit it you are working for your business and not truly working for yourself.
Using percentages is useful as you know that for every £ or $ of sales, what proportion is Profit, Cost of Sales, Overheads, and so on.
It’s easy to calculate your weekly/monthly breakeven
Take your break even sales figure
1. Per Year £375,000
2. Per Month /12 = £31,250
3. Per Week/52 = £7,211.54
4. Per Day = £7,211.54 /5 = £1,442.31
You can also figure out the point in the week/month you actually start working for yourself
1. Take the number of hours your business operates each week (e.g. Monday to Friday 9-5 = 40 hours.)
2. Calculate the break even percentage 50% (e.g., Breakeven 375,000/ 750,000 *100)
3. Multiply your total weekly hours by the Break even percentage. (40 hours multiplied by 50% = 20)
4. Work out when in the week you complete the breakeven hours. (20 hours = after lunch on Wednesday you start to earn for yourself).
What would it take to bring your break-even forward?
2. Profit early warning system
The breakeven gap also acts as the ultimate profitability “early warning” system. If profitability starts to slip you will see it here first, as breakeven tracks all costs. So to keep your finger on the pulse of your business routinely monitor and track the size of the gap.
For example, let’s say:
Sales = £750,000
Breakeven Sales = £375,000
Breakeven Gap = £375,000
Gap % =50%
What happens when that Gap or that simple Gap % starts to reduce? Warning alarms should sound and you need to investigate, generally the areas to investigate are:
1. Pricing – have you lost your mind and started giving discounts?
2. Cost of Sales – Have your cost of sales have started to increase?
3. Overheads – Have you taken on more fixed costs?
The breakeven gap is quite literally the margin of safety for your business. When the inevitable dips in the economy or business performance occur it enables you to keep trading, when times are good it makes sure you maximise your earnings.
3. Your effectiveness score.
As breakeven tracks all of the costs and gross profit, measuring it shows you how effectively you are managing your whole business. It’s no good focusing on sales and delivering record performance if your costs are out of control and you are making no money.
Breakeven acts as a simple yardstick to show how you are managing the key parts of your business machine and the interdependent parts within it.
Is this already part of your regular management process? If you have any questions or comments please reach out here