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The Secret to Avoiding Business Losses

21 Dec

The Secret to Avoiding Business Losses

The best way to avoid business losses is to understand what your break-even point is.

Obviously the objective of business isn’t to break-even, but to make a profit.

Break-even is the amount of sales you need to make to end up with $0 profit.

Too many businesses don’t know their break-even point and therefore don’t set targets weekly/monthly to ensure they are profitable.  A great start to profitability is to know what your break-even point is.  

Once you know this, you can use it as a basis for setting your targets of profitability.  You can give each salesperson, division or team, individual targets to achieve overall profitability.

  1. Break-even is impacted by fixed and variable costs.  
  2. Fixed costs are those that you incur all the time, e.g. rent, admin wages, telephone etc.  
  3. Variable costs are those incurred in making a sale, e.g. a product and associated costs like freight inwards, packaging etc.  
  4. If you’re selling a service it’s labour and materials on the job.

Gross margin

When you’ve calculated variable costs per product or job you then calculate gross margin.  

For example if a product costs $40 (including all costs associated with getting the product ready for sale) and you’re selling it for $100, gross margin is 60%.

Fixed Costs

Now you need to know fixed costs.  Let’s say they are $30,000 per month.

  1. To work out break-even sales – take fixed costs of $30,000 divided by gross margin of 60%, which gives a figure of $50,000.  This is your monthly break-even total sales.  
  2. If your average product sale is $100, divide the total sales break-even figure of $50,000 by your average sale of $100 to come up with a figure of 500 units to breakeven.  
  3. In simple language this means you have to sell 500 units per month at $100 to break-even.

Now you know your break-even, use this as a basis for setting targets to achieve your desired profit.

For example – with every additional unit you sell above the break even volume of 500 units, you will make $60 profit, which is the gross margin per unit of sale.

Therefore if you target to make $6000 profit you will need to sell an additional 100 units.