The Break-Even Number
In a very complicated world, it is always great to simplify things – to have goals, a clear vision, a one-pager plan. But for most entrepreneurs, numbers are one of those complicated matters best left to others, although it needn’t be that way. And when it comes to one particular number, it cannot be that way: that number is the break-even figure. It’s the one number every entrepreneur must know. If you don’t have a break-even figure, how will you know if you’re succeeding or failing?
What is it?
A break-even figure is the amount of sales you need to make in a month to cover all expenses and to make a target profit. If you can calculate this, then you have a number that you can chase every day – something that is measurable and understandable for the entrepreneur.
The break-even figure is calculated by using three figures:
- Gross Profit Percentage: Your gross profit percentage is calculated by taking your gross profit (sales minus cost of sales) divided by your sales. Let’s say you sell a product for R200 and the cost of that product is R150, then your gross profit will be R50. Your gross profit percentage therefore is 25 per cent (gross profit (R50) divided by sales (R200)).
- Overheads: Overheads are the total of all your fixed expenses each month. Examples include rent, salaries, Internet, fuel and all other costs that you need to pay, e.g. R100000.00.
- Profit Target: This is the profit you would like to achieve in a month, e.g. R20 000.00.
Now that we have these three figures, we can calculate our break-even amount:
Break-even = (overheads + profit target) divided by gross profit percentage
So, continuing the above example:
Break-even = (R100k + R20k) / 25% = R480 000.00
This means that you must make sales of R480 000.00 per month to cover all your overheads and achieve your profit target.
If you have this figure you can now plan how to achieve this target and go out every day chasing a goal, rather than just crossing your fingers… One can take this number and divide it by the number of working days in a month to get to a daily target of sales.
Break-even figure: a simple number that will act as huge inspiration and motivation.
A break-even figure is the amount of sales you need to make in a month to cover all expenses and to make a target profit.
Need an Accountant?
If you are a business owner looking for a new accountant, then view our pricing and services info here.