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Solid Web Strategies

Contact: Susan Beckingham
Address: Lower Ground Floor, 26 St George's Terrace, Brighton, East Sussexx, BN2 1JJ
T: 01273 281 326 | M: 07816 684 756
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I am often asked what my key priorities are when running a business and for me, its knowing my break even point ranks alongside cost prices, current stock holdings and most importantly, the bank balance!

Why is it important?

It is important to know what your break even point is for planning purposes as it will allow you to make decisions regarding additional costs, new staff or sales. For instance, if you know your break-even point, you can calculate the volume of sales needed in the top of the funnel to ensure that you turn a profit. You can then extrapolate this and carry out a ‘what if’ analysis e.g. what does it look like if I add another £20k salary into the business, what increase in sales do I need?

Is it the same every month?

No, the break-even point is not necessarily the same every month and this will depend largely on the line of work you are in. Most service businesses will have a relatively static underlying cost base but a manufacturing or distribution business will fluctuate based on demand, seasonality and purchasing costs.

Some businesses that have a more variable monthly break even point will take an annual view, once they are comfortable with what an ‘average’ year looks like.

How does it change?

The break even point is made up of a series of fixed and variable costs associated with running the business. Some aspects will be linked to each other with an increase in one resulting having a knock on effect to associated costs but others will be fixed and will allow for a degree of pressure before they need to change. A good example of this is the effect of increased staff levels.

Adding a new member of the team may mean additional IT costs, extra salary payments and may even increase the cost of utilities (although marginally). Assuming that you have space, the cost of rent does not change for the addition of another head. In this instance the proportional cost per head actually drops for rent. It is only when you run out of space that you need to consider increased establishment costs – but then the process simply starts again and you can plan for further expansion.

What do you do with the information?

I have seen some businesses use their break even point to determine pricing structure. They know that after X point in the month (in some instances they even know this down to the date) everything after that is profit and therefore will not negotiate on anything up to that point, but once break-even is achieved/passed, they relax their pricing strategy. In one instance I have witnessed ‘accelerators’ whereby for each % past break-even, the pricing strategy relaxes further still. When the calendar clicks over, the handcuffs are reapplied and the price charged for the service is set back in stone. It might sound rather iterative but it worked for them and led to a stronger, more focused sales team.

So knowing your break even point can make a massive difference to how you plan and how you sell. But aside from all that, it proves that you know how you company ticks and what it needs just to open the door each day. It certainly keeps you focused. To find out how to determine your break even point get in touch – I would be happy to help.