So what is breakeven anyway?
It is the point at which sales or invoiced revenue provides sufficient gross profit to cover cost of sales and overheads. At this point there is no excess profit and no loss.
So, how well do you understand your breakeven point? Do you know how much revenue you need per day, week or month to cover your costs? Do you understand the breakeven for specific businesses units, teams or projects in your business? Understanding your breakeven puts you in a much stronger position to assess the impact of additional costs and margin fluctuations. If you share this information with your team members it also helps them understand what impact they have on the business day to day and on what they should be focused on. To calculate your breakeven, use the following formula:
Average Overheads/ Average gross margin
For example: Company A
has a gross profit margin of 35% and monthly overheads average out at £20,000. The formula is: Average overhead PM (£20,000) / average gross margin (35%)
i.e. £20,000/0.35 = £57,142.86
This means that Company A
would need to invoice £57,142.86 per month to cover all costs. The power of this is that if the gross margin was 5% higher the breakeven would fall to £50,000. That’s £85,000 per year less sales required to pay the bills! So, what’s your breakeven?
PS: If you would like help in understanding or improving your breakeven email me on firstname.lastname@example.org