Do you know what the breakeven position is in your business?
Jun 23, 2020
Do you know what the breakeven position is in your business? Do you even know what that is?
If you don’t know (and it’s totally ok if you don’t), breakeven is when your sales and costs are the same ie zero profit. This is taken after tax to ensure this doesn’t get forgotten.
Start with working out your fixed costs. These are the items that, if you didn’t have any income, would still exist. This might be your website, insurance, accounting costs, employees, office space costs, tech (G suite, zoom etc) or manufacturing costs. Also, anything that you are paying on a payment plan to ease the payments. Anything that you can’t just turn off if your business stopped for a period.
Then look at the variable costs. This could include paying yourself although I think you should be aiming for a minimum fixed cost each month to pay yourself. So put in how much you need to live in this section. Plus other costs that can be removed or changed. This might be your VA or social media manager, or other “nice to haves”. Look at how these might change if there was a drastic change in your income.
Add these two numbers together then add the tax. This is 30% as a sole trader and 19% corporation tax for a limited company. Don’t forget to keep aside 15% of your drawings from the business though if you are a limited company.
So, let’s say you have fixed costs of £1,500 and variable costs of £500. Total cost £2,000. Add tax - £600 as sole trader and £380 for a company. Sole trader - £2,600, Limited company £2,380.
These are your costs in your business, and this is the breakeven point. So you would need to make exactly this amount in sales to breakeven. Look at this for a year if you have very variable costs throughout the year.
Now look at this number. How easy is it to reach in sales terms? Is it a crazy high number or is it manageable to make this number on average every month?
If it is manageable, your business costs are under control and this is an efficient way to run your business, as long as you are taking out what you need/want to live on.
If you are struggling to make enough sales in your business, think about cutting your costs in the first instance. There are obviously strategies to increase your sales, which you should be doing too, but today I’m talking about cost control. Make sure all your costs in your business are totally necessary, and aren’t nice to have. Also, ensure your costs are for the business you have, not the one you want.