Tuesday, January 18, 2011

Know Your Breakeven!

clip_image002This article was written by Dick Ginnaty, CPA

Knowing your breakeven (i.e. the amount of sales (annually, monthly, weekly or daily) required just to pay all your bills) is essential anytime but even more so now during this soft economic time. Knowing your breakeven, and knowing the fixed and variable costs that are required to calculate it, is critical.

Step 1 is to analyze your costs and to classify each one as either fixed (i.e. those costs that tend to remain regardless of your sales, such as rent) or variable (i.e. costs which vary directly with sales, such as material costs for a manufacturer, wholesaler or retailer). The keys here are to look hard at your fixed costs to determine if they can be made variable (i.e. will the landlord accept a percentage of sales instead of a fixed monthly rent), and to analyze your variable costs to determine if they can be reduced without suffering quality deterioration.

Step 2 is to divide your fixed costs (either annually or monthly) by your variable cost profit margin (Sales less variable costs). The answer to this calculation is your breakeven sales dollar (i.e. the amount of sales in dollars, so that after paying for all the variable costs associated with the sales, all fixed costs are covered also.)

IF after you make this calculation, you find you are selling at less than breakeven, it is time to act. Look hard at all costs because failure to cure the problem (not generating enough from your sales to cover all your cost is the prescription for disaster.

Good luck and here’s hoping it “all adds up” for you.