BREAK-EVEN ANALYSIS MADE EASY

Nick Roberts

The term "Break-Even Point" refers to the level of sales necessary to cover all expenses i.e. the point of no profit or loss. To calculate this, you need the following:

• Your expenses
  
• Your sales
  
• Your gross profit percentage which is your gross profit (sales less your cost of sales) expressed as a percentage of your sales.

Your break-even point is calculated by dividing your total expenses by your gross profit percentage and then multiplying by 100/1 e.g. if your sales are $180,000 and your gross profit $90,000, your gross profit percentage would be 50%. Your expenses are $60,000. 

Expenses                                                                                                                                      60,000

Gross profit percentage                                                                                                                 50%

Total costs divided by 50                                                                                                             1,200

Multiplying this by 100/1 equals the break-even sales                                                       $120,000

Complications include:

1. Just breaking even means that there is no return on investment for the owners, so add the required net profit to the expenses to give you a more realistic break-even point.
2. Variable costs. Not all expenses are fixed e.g. if your sales vary your business expenses may also vary.
3. Proprietor's costs. Your expenses may exclude remuneration for the business owners which needs to be adjusted for.

Every business operator should know what the fixed costs and unavoidable variable costs are for them to open their doors and should be aware of their gross profit so that the break-even point at that level of operations can be determined. This will enable them to monitor their actual sales performance as against their break-even figure thereby motivating them to achieve sales beyond the break-even figure.

If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail nick@abac.co.nz or use "Contact Us" on www.abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice.