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
Break Even Analysis
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.
A break-even analysis predicts the sales volume, at given prices, required to recover total costs. 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 %, which is calculated by dividing the total cost of sales by the total sales, expressed as a percentage.
Your purchases have been $10, 000.00, of which there is no stock left on hand. Therefore, your cost of sales has been $10, 000.00 plus $300.00 packaging and $100.00 transport to fetch the stock which you bought. Total cost of sales then is $10, 400.00, all inclusive. Your business has overheads of $7,000 per month, which includes your salary.
You know that your mark-up on your products is 100% on purchase price. Thus your sales value was $20, 000.00. Your gross profit percentage is calculated as follows:
Less direct costs: Raw materials, products. $10,000
Other direct costs, commission & packaging $400
GROSS PROFIT $9,600
Gross Profit % = (9,600 / 20,000) X 100 = 48%
Break Even Point calculation:
Total Overheads / Gross Profit Percentage. 7,000 / 48% = $14,583.34
Therefore, to break even, thus making zero profit, ensuring that you cover all your costs and running expenses, you will have to make minimum sales of $14.583.34 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.
To read more along these lines, follow the information in the author's biography.
Vaughan, an accountant with 35 years experience, writer of books and articles to help the business owner better manage their business..
Email address: email@example.com
His books are available at: