It is important all small business owners know the breakeven point for their business – that is; what you need to generate on a monthly and weekly basis to cover all your operating expenses, goods purchased for resale and crucially, what you need to draw from the business to maintain the lifestyle you desire.
Knowing your breakeven point has many benefits:
- It allows early remedial action to be taken if sales are falling short of budget – you don’t need wait until production of quarterly or half yearly accounts to recognise there is a problem that needs to be addressed.
- It can highlight potential future cash flow shortfalls – again allowing early action to be taken – rather than waiting for a cash flow crisis to arise!
- Targets for the sales team can quickly adjusted and new or different strategies developed.
In addition to the foregoing, knowing your weekly or even daily breakeven point can also assist with the determination of pricing for products and services. If you know what you need to cover on a weekly basis then it is a relatively easy exercise to then establish what volumes you need to sell to breakeven and from this, determine your pricing.
Similarly, if you charge an hourly rate for your services – you can divide the weekly costs by the number of billable hours you work each week to determine what your hourly charge out rate needs to be in order to breakeven.
The TSBI Breakeven Analysis and Forecasting Tool
The TSBI Breakeven Analysis and Forecasting Tool has been developed over many years of working with small business owners – it will help you to:
- Establish what you actually need to draw from the business in the form of a living wage to cover all your personal expenses and maintain the lifestyle you desire
- Calculate what you need to generate on a monthly and weekly basis to breakeven
- Establish monthly and weekly sales targets that cover all your expenses and a margin for profitability
Ensure you complete the Family Budget element of the process!
- The breakeven calculation is incorrect
- Sales targets will be short of what is actually needed
- Pricing will be incorrect
- Unplanned cash withdrawals will be needed to maintain your lifestyle impacting on the business cash flow
Other ways the Breakeven & Forecasting Tool can be used
- What level sales need to be to justify the employment of addition staff
- Whether the purchase of additional major equipment can be justified
- How much sales would need to increase to justify a move to larger premises
- As the basis for completing a monthly Cash Flow Forecast (Simply note the month when expenses are due – its makes preparation of the forecast very easy)
In business knowledge is power!
Knowing your breakeven point provides a great foundation for so many things in your business. Armed with this knowledge your pricing is far more likely to be soundly based. You will get an early warning when things are not going to plan. You will be more agile than your competitors and able to adjust strategies far earlier than would otherwise be the case. Major decisions can be based on a lot more than simply “gut feel” – wishing and hoping!
If you would like to learn more about how to use this tool and get the financial side of your business under control consider enrolling in our “Decide Your Income” workshop – the cost of which includes a FREE session with an experienced SBMS Business Mentor.