It sounds easy right? If you have more money coming in than going out – you’re making money. But how do you know exactly how much money you’ll need to meet all of your expenses, and when exactly you will start making a profit? Your money coming in is probably not on the same schedule as your money going out, so you need a plan that will work year round.
Why is your break-even point important?
Although you’ll probably have several different places where money comes in and goes out and all manner of reports tracking bits and pieces, a break-even calculation brings all of these numbers into one place. It gives you a clear picture of what it costs to keep your business afloat, and how much money you would need to bring in for your business to be thriving.
What makes a break-even calculation so useful is that it’s not just a report of what has happened in the past, it can be used as a tool to better understand your financial needs. This allows you to plan for the future to meet all of your expenses, and hopefully make a profit. It is also an opportunity to look critically at all of your expenses.
Once you know your break-even point, you can feel confident that you know the financial state of your business, and not wonder if you’re going to be able to afford to pay bills, staff or invest in something new.
How to calculate your break-even point and daily targets
1. Add it all up
Seriously, ALL of it. Look over the past year at every dollar the business has spent. Check all of your bank and credit card statements; find every dollar that left your accounts. Write it all down, or even better, add it to a spreadsheet. Include all of your expenses whether they happen regularly (like rent, wages, tax, and stock orders) or only once or twice a year (like equipment purchases, bonuses, and staff parties).
2. Divide it up
Now you’ve got a whole year of expenses, every last dollar, in one document, but right now it’s just a big scary number and not all that useful. You’ll need to divide it up to learn your break-even point on a weekly (divide it by 52) or monthly (divide it by 12) basis.
Once you have your weekly number, you can keep an eye on the money coming in each week, and know when you have reached your break-even point. After that, everything else is profit! You probably don’t want to wait until the end of the week to see if you broke even or not, a daily break-down will help you keep on track and stay aware of the bottom line. Divide your weekly number over the number of days you’re open each week. Some days of the week you may expect more revenue than others, so you don’t need to divide it evenly as long as it adds up to the weekly break-even amount.
3. Plan to make a profit
Of course you’ll want your business to do better than just breaking even, so add a little extra to your daily break-even number to create a target for each day. If you can reach these targets you will be on track to make a profit. If you can’t, you may need to look into ways to increase the profitability of your business.
Bringing in more money is not the only way to increase your profit. Take a good, hard look at your expenses that you wrote down in step 1, and see if you can reduce or eliminate any of them. Perhaps you could save money by reducing waste or by negotiating better rates with suppliers – that includes your power and internet providers as well as your retail and stock suppliers.
Your break-even calculation is a living document, which means you should update it as things change. You may need to add or remove expenses, for example, if you gain or lose a staff member, buy new equipment or reduce any of your operating costs.
Calculating your break-even point allows you to plan for the future, make wise financial decisions and grow your business. It’s easy to do, so why not get started?