Calculating Break-Even
Sometimes, especially when sales are down and cash flow seems to be non-existent, it's nice to be able to calculate a break-even for your company. It's really simple. All you need to do is to break down your expenses into variable and fixed.
For variable expenses we need the actual ratio or percentage. For fixed expenses we need a $$$ dollar total.
First, take your Profit & Loss statements (12 months is ideal), and write down the percent of variable expenses. Normally that would be the percentage shown for Cost of Goods. That should typically range between 24-32% or so.
How do we treat Labor/Payroll? Well, only you can decide whether we will treat that as a variable or a fixed expense. I recommend that it be treated as a fixed expense because like it or not that seems to be the case.
Once you have the percent of variable expenses, and the dollar amount for fixed expenses break-even is simple to calculate. You divide the total $$$ of fixed expenses by (1-% of Var. Expenses). Below is a real-world example. Let's call it Hard Rock Printing & Graphics.
Annual Sales for Hard Rock in 2011 was $446,575, or $37,215 per month. Fixed Expenses was $293,268. Variable expenses was/is 30.7%.
Break-Even = $293,268/(1 - .307)
Break-Even = $293,268/.693
Break-Even = $423,186 or $35,265 per month.
That means the company must have average minimum monthly sales of $35,265 in order to pay all the bills and still be able to pay the owner his/her current salary. That's the monthly "nut" this company must achieve if it hopes to remain in business. As you can see, this company is cutting it close with average monthly sales of $37,215, or just about $2,000 more in sales than it has in expenses!
What are the minimum amount of sales my company needs to survive if I don't take salary out? Well, you can calculate that as well, by subtracting your salary from the $$$ of fixed expenses. Your break-even will be lower, but then again how long can you survive without taking out a salary?
Try the the above and let me know what you find out.
For variable expenses we need the actual ratio or percentage. For fixed expenses we need a $$$ dollar total.
First, take your Profit & Loss statements (12 months is ideal), and write down the percent of variable expenses. Normally that would be the percentage shown for Cost of Goods. That should typically range between 24-32% or so.
How do we treat Labor/Payroll? Well, only you can decide whether we will treat that as a variable or a fixed expense. I recommend that it be treated as a fixed expense because like it or not that seems to be the case.
Once you have the percent of variable expenses, and the dollar amount for fixed expenses break-even is simple to calculate. You divide the total $$$ of fixed expenses by (1-% of Var. Expenses). Below is a real-world example. Let's call it Hard Rock Printing & Graphics.
Annual Sales for Hard Rock in 2011 was $446,575, or $37,215 per month. Fixed Expenses was $293,268. Variable expenses was/is 30.7%.
Break-Even = $293,268/(1 - .307)
Break-Even = $293,268/.693
Break-Even = $423,186 or $35,265 per month.
That means the company must have average minimum monthly sales of $35,265 in order to pay all the bills and still be able to pay the owner his/her current salary. That's the monthly "nut" this company must achieve if it hopes to remain in business. As you can see, this company is cutting it close with average monthly sales of $37,215, or just about $2,000 more in sales than it has in expenses!
What are the minimum amount of sales my company needs to survive if I don't take salary out? Well, you can calculate that as well, by subtracting your salary from the $$$ of fixed expenses. Your break-even will be lower, but then again how long can you survive without taking out a salary?
Try the the above and let me know what you find out.
Labels: Break Even Calculations
posted by The Quick Consultant at
9:43 AM
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