Breaking even – checking the numbers

Posted on 26th February 2023 by Streets Business Support


Image to represent Breaking even – checking the numbers

In previous newsfeeds we have described how you can calculate the level of turnover you need to create in order to meet all your costs whether they be fixed costs (rent, rates etc.,) or variable costs (goods you need to buy to convert into goods you sell).

For example, if your fixed costs are £50,000 per annum and your gross profit (the difference between your sales and direct costs) is 25% of your turnover, the annual turnover you need to breakeven will be £200,000. The formula is:

Annual fixed costs divided by 25 (the gross profit percentage) multiplied by 100.

If you have no variable costs, your breakeven turnover will be your fixed costs. And be sure to include your drawings/dividends/salary as part of the fixed costs.

Unfortunately, you will need to make this calculation each month to have any certainty that you have a realistic estimate of your breakeven turnover.

Over time, you could probably place more reliance on any underlying trend in the numbers you calculate.

The main factors that will change your breakeven calculations are increases or decreases in:

  • The amount you pay for any direct costs, to purchase goods or labour to convert into the products you sell.
  • The amount you pay for fixed costs – that do not tend to increase or decrease based sales volume. For example, premises costs, professional fees and admin support costs.

While inflation is high these costs will quickly escalate.

And what if you need to invest in your business? If you do not have retained funds to meet investment costs you may need to borrow to fund the investment. This will increase your costs (interest charges) and require that you produce enough retained profits, as a result of your investment and general trading, to meet lending repayments.

We can help. Call if you need help to consider your planning options. To find a way out of the present difficult trading conditions we may all need to do more than just breakeven.


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The content produced and presented by Streets is for general guidance and informational purposes only. It should not be construed as legal, tax, investment, financial or other advice. Furthermore, it should not be considered a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset. The information provided by Streets is of a general nature and is not specific for any individual or entity. Appropriate and tailored advice or independent research should be obtained before making any such decisions. Streets does not accept any liability for any loss or damage which is incurred from you acting or not acting as a result of obtaining Streets' visual or audible content.

Information

The content used by Streets has been obtained from or is based on sources that we believe to be accurate and reliable. Although reasonable care has been taken in gathering the necessary information, we cannot guarantee the accuracy or completeness of any information we publish and we accept no liability for any errors or omissions in material. You should always seek specific advice prior to making any investment, legal or tax decisions.


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