Improving your Bottom Line with a Cohesive Break-Even Analysis

 The Break-even point is where the cost of your business is equal to the income; at this point, your business is neither making profits nor in a loss but is breaking even. For any business to be sustainable, whether small-scale or large-scale, the business owner must know the company’s break-even point.

A break-even point defines the target that a business should achieve to stay afloat. Break-
even analysis, as the name suggests, concerns the analysis of the break-even point so that the company can set financial and operational targets for the business to sustain itself. Through the break-even analysis, the business owner learns about the volume of sales they must achieve to take the company forward.

As your local accountant in Blue Mountains and Greater Sydney, we can help businesses find out their break-even point.  We can do a complete health check of your financials, analyze your sales, costs and overheads and work out the various components needed to work out the break-even point.

In this article, we aim to encourage you to improve your bottom line with a cohesive break-even analysis. To achieve this, you must:

 1-   Identify Your Company’s Break-Even Point:

First and foremost, the business owner must identify their company’s break-even point. But to get to that, you need to know your costs. What this entails is for the owner to know their fixed and variable costs – fixed costs are those expenses that remain the same irrespective of production and variable costs depend on the production. Additionally, business owners also need to understand the pricing of their goods and services.

 

Both variable and fixed cost factors into the equation and have a direct impact on your profit, hence you must know when a planned or unplanned change is occurring. You need to ask yourself the below questions:

Ø  What are my fixed and variable costs

Ø  Are my products/services reasonably priced to gain the profits required to grow my business?

Ø  What changes would I like to see in my costs and revenue?

Ø  How are my fixed costs affecting my revenue

    2- Make Use of the Break-Even Formula:

 At first, this may seem to be a daunting task. But the formula to calculate your break-even point is quite simple.

The break-even point is the point where a company’s revenues equal its costs. The calculation for the break-even point can be done one of two ways; one is to determine the number of units that need to be sold, or the second is the number of sales, in dollars, that need to happen

Below are the formulas for calculating the breakeven points

FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)

Or

FIXED COSTS ÷ CONTRIBUTION MARGIN (difference between the price of a product and what it costs to make that product)

As your local accountant in Blue Mountains and greater Sydney, we can assist you in calculating your contribution margin, working out your true fixed cost and variable cost per unit. With the help of this information, we can illustrate the per-unit impact on your bottom line. Furthermore, this can be used for forecasting and budgeting a swell.

 Hire an Expert Accountant:

If you are a start-up and cannot afford to hire an expert accountant, consider outsourcing your accounting to a firm that’s mastering the field. Some of the reasons why it is a beneficial approach for businesses:

Ø  They can review your data and make sense of trends and patterns

Ø  They can customize a financial model to meet your accounting requirements

Ø  They can prepare sensitivity analysis and show figures for your team to achieve

Ø  By switching certain costs, and applying revenue assumptions, they can map out the impact minor financial changes will bring to your break-even point

Ø  They are experts for a reason, and you can trust them to do the job for you

Ø  They are highly likely to have on-boarded a team of expert consultants and you can benefit from your wisdom without having to employ accountants who come with a six-salary figure. 

As your local accountant in Blue Mountains and greater Sydney we can help you with all of the above.

Business owners quite often make the mistake of not considering their break-even data when placing price tags. This small mistake can cause huge losses that might be irrecoverable in the long run and affect a business’s sustainability.

Break-even analyses are insightful and can help busy business owners understand how they can better allocate resources and align efforts to achieve their targets. Break-even analyses are highly useful also when it comes to evaluating the performance of the firm and when applying for loans and investments. Therefore it pays to have a professional accountant on board who can do this work for you, while you continue to concentrate on aspects that can grow your business. 

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