The article instructs business owners on calculating and analyzing their break even point.
|Business Break-Even Analysis - By Vaughan Jones - ONE Scribe.
This article instructs business owners on getting to grips with a typical income statement and the Break-Even Analysis calculation, using information contained in the standard Income and Expenditure Statement. This will empower business owners to doing their own accounting and financial management.
Of all the financial analyses, this is the greatest. It facilitates knowing at exactly what point in income that the business will start to make a profit. The break-even analysis predicts the sales value, at given prices, required to recover total costs and overheads. In other words, it's the sales level that is the dividing line between operating at a loss and operating at a profit.
Expressed as a formula, Break-Even is:
Total Overheads (expenses) / Gross Profit %, GP% is calculated by dividing the total cost of sales by the total sales, expressed as a percentage.
A Simple Income and Expenditure Statement
Sales and/or services 208,000
Less Cost of sales 104,000}
Gross Profit 104,000
Rent of premises 20,000
Owner’s salary 36,000
Total Expenditure 52,000
Net Profit before taxation 52,000
Your purchases are R100,0000, of which there is no stock left on hand. Therefore, your cost of sales has been R100, 000 plus R3,000.00 for packaging and R1,000.00 transport to fetch the stock that you bought. The total cost of sales then is R104,000 all-inclusive. Your business has overhead expenses of R52,000 per month, which includes your salary.
You know that your mark-up on your products is 100% on the purchase price. Thus, your sales value was R208, 000.00. Your gross profit percentage is calculated as follows:
Less direct costs: Raw materials, products. - R100,000
Less other direct costs, packaging -R4,000
GROSS PROFIT R104,000
Gross Profit % (104,000 / 208,000) X 100 = 50%
Break Even Point calculation:
Total Overhead Expenses / Gross Profit Percentage. 52,000 / 50% = $114,000
Therefore, to break even, thus making zero profit, but ensuring that you cover all your costs and running expenses, you will have to make minimum sales of R208,000 per month. This premise will hold true whilst your costs and expenses remain the same. But, as long as your gross profit percentage remains unchanged, the method of calculation will always remain true, although the Break-Even Point value will change.
I suggest that you try this calculation out for yourself using a number of different scenarios to gain some experience.
About the author
Vaughan, an accountant with 35 years of experience, is a writer of books and articles to help business owners and freelancers successfully manage their businesses.
Email address: firstname.lastname@example.org
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© Copyright 2018 Vaughan Jones - ONE Scribe