Knowing your breakeven

Running a business full of concepts, KPIs, measures and levers that all impact the ultimate performance and success of the business.

One powerful measure that should sit high on your attention list as a business owner is the breakeven point. If you have an understanding of what yours is, you can steer your business with more certainty and efficiency.  Sharp business operators can take this data further and overlay it with the business drivers to not only understand what needs to be achieved in a dollars sense but also what is required at a physical level to achieve these. Whether you’re running a small startup or overseeing a large corporation, knowing how to calculate and interpret these figures can significantly improve your decision-making process. 

What is Breakeven?

If you look up the definition, breakeven is the point at which total revenues equal total costs. In other words, it’s the sales level at which a business neither makes a profit nor incurs a loss. However to get the full benefit of this metric we should take this further. We should consider our breakeven to be what we need to make in revenue in order to not only cover our direct and operating expenses, but also to ensure you are paying yourself as a business owner a salary that is commensurate with the market rate for your position in the business, any debt commitments (we want cash to cover principal repayments), the return of your investment and most importantly a reasonable return on your investment (to compensate for the risk) in your business. 

Reaching this breakeven point is vital as it helps you as a business owner continue to make the best use of your invested funds and operate a sustainable business now and into the future. 

How We Calculate the Breakeven Point

To calculate break even as above we need to look at financial data as well as apply assumptions to these too, it is also important to document and make note of these assumptions so when using this data we can look at actual conditions and results compared to what we assumed they would be and adjust our numbers if necessary. 

The key data and assumptions needed are

1. Our overhead expenditure, this can be taken from budgets and or historical data. Make sure to update expenses that tend to increase each year like wages and rent. 

2. The gross margin you achieve on revenue.

3. The total of any capital commitments (loan repayments etc.) over the course of the year. 

4. The investment you have made into the business and what you require as an annual return on this investment. 

5. The time line applicable. This is important as we want to understand what is required in terms of revenue each year to not only provide return on your investment but also return of your investment within a specific time frame. For some businesses this may be within the lease period if the business is somewhat dependent on its location. It may be a loan term, it could also be the term of a patent or non compete clause. If we go beyond these points there is potentially less certainty in ability to maintain revenue and we want to ensure full return of investment and all liabilities cleared before this. 

From all of this we calculate a minimum amount of profit required each year, add this to overheads to come up with a minimum amount of GP required and divide this by your Gross Margin to get the annual required revenue. 

This forms the basis of some powerful decision making data. From your revenue per sales data we can calculate the number of units you need to sell or clients you need to see per Year, Month and Week. We can cross check this against your available capacity to assess business viability at a certain cost basis and sales prices. 

E.g if your break even is showing you need to see 100 clients per week, but you only have the staff capacity to service 80 we can immediately tell that the required breakeven is unachievable. We can then focus on the parts of the business that can impact this. We can assess the ability to bring on new staff, consider if there are any overhead costs we can cut or can review our fee structure and increase where necessary to make the numbers work. 

We can also use this to set sales targets, staff KPIs and business budgets. The use of this data and analysis can also be helpful in weighing up growth or investment opportunities. If growing revenue comes with additional overheads we can analyse how much of the additional revenue makes it to our bottom line and whether or not it is providing adequate return on the additional investment required. 

Breakeven is a great measurement for understanding the bar a business needs to jump over to stay sustainable long term.