Home 5 Business Support 5 Why breakeven analysis can be illuminating

Why breakeven analysis can be illuminating

14 November 2023

Optimize business success by calculating breakeven turnover. For services, add total costs and remuneration; for goods, use gross profit percentage. Achieving sales beyond breakeven generates profits. Contact us for expert assistance.

Importance of Accurate Accounting Records

If you focus your energy on sales, there is a chance that your efforts will produce losses. This is why we encourage our clients to keep their accounting records in dedicated software. It’s best to keep accounting records in software that automatically produces monthly management accounts that reveal profitability and turnover costs.

But there is another useful indicator that you can compute once you have these monthly trading results. It’s the turnover you need to achieve – based on current costs – to breakeven, make no profit & no loss.

If you provide services, rather than process goods for resale, the amount of turnover you need to create each month to breakeven will be your total monthly costs plus any remuneration you take from the business.

For example, say your costs are £35,000. Additionally your monthly remuneration not included in those costs (dividends perhaps or drawings if self-employed) is a further £5,000. Then your current breakeven turnover is £40,000 a month.

Calculating Breakeven Turnover

The calculation is slightly different if you process or buy and sell goods for resale as each £1 of sales will need to cover the direct costs – of buying and processing goods – as well as other fixed overheads that do not change with the level of turnover achieved. To calculate a breakeven analysis figure, you will need to divide your fixed costs by the gross profit percentage and multiply by 100. So, if fixed costs are £40,000 a month and your gross profit percentage (sales less direct costs as a percentage of sales) is 25%, your breakeven turnover would need to be (£40,000/25 x 100) £160,000. At this level of trading, you would produce £160,000 times 25% – £40,000 of gross profit which would exactly cover your fixed costs.

Obviously, to make progress financially, you would need to achieve sales in excess of your breakeven turnover. Never-the-less, this is a useful indictor to have as when you achieve this target you will know that any additional sales will be creating profits for your business.

If you have the data, we can help you produce a realistic breakeven analysis figure for your business. Please call to organise.

Source: Other Tue, 14 Nov 2023 00:00:00 +0100

You may also like these

Here are some more articles that might interest you

Expert Advice

If you’d like more information on anything you’ve read, we’re here and happy to help