Every business has a break-even point, which represents the minimum amount of cash to bring into the business on a given month in order to at least be able to cover your cash expenses for the month, or larger profit goals. The reason the media call the Friday after Thanksgiving Black Friday is that many businesses do not reach their break-even point for the whole year until that day, due to the tremendous volume of sales.
Determining your break-even point involves a similar process to thinking through your business plan, wherein you not only gain better understanding of your business but also learn which areas offer ways to cut expenses and boost profits.
In this article, I will share with you how to calculate your own break-even point, and share 3 tips for lowering it.
Calculating Your Personal Black Friday
The first step I recommend is to establish your own break-even point. You reach your personal Black Friday when your fixed costs plus variable costs equal your income.
After hitting this point, all further sales become profit, less any additional variable costs for manufacturing and sales expenses.
- Fixed costs include rent, salaries, maintenance, licenses, equipment, and other overhead expenses.
- Variable expenses include the cost of wholesale goods, manufacturing, sales commissions, advertising, utilities, and other expenses needed to produce the number of goods or services you sell.
- These expenses also apply to intangible products that require software developers, consultants, website managers, pay-per-click advertising, and other expenses associated with creating intangible products or services.
- Income includes the gross sales prices of the number of goods or services sold, whether wholesale or retail. The higher the number of goods, the higher the variable expenses will grow.
Consider all the expenses you might overlook in your specific line of business. Having more salaried employees or too expensive an office space are two examples that might lead to this. You might be paying too much in advertising to produce the same number of leads. There could be a number of expenses you could lower.
You can change your break-even point by cutting overhead expenses and other fixed costs, reducing variable expenses, increasing sales transactions, or charging higher prices.
Below are three proven ways to change your break-even point:
Cut Manufacturing Costs or Raise Prices
The price of your goods must be high enough to cover manufacturing (or service delivery) costs, fixed expenses, and returns on investment. If your analysis shows a high break-even point, you should consider raising prices. You can also try to find ways of cutting expenses by finding cheaper suppliers, buying in bulk to get discounts, lowering advertising costs by targeting customers more efficiently, or lowering the raw materials' quality that you use to make products.
- Niche-type companies can usually raise their prices 3 to 5 percent without causing too much backlash from customers.
- Increasing productivity will lower your costs of goods.
- Inventory control can often find sources of waste, theft, or inefficient production techniques.
- Telephones, energy costs, worker wages, and commissions also add to variable costs. You might convince salespeople to take greater risks for higher future commissions, reducing expenses until you reach your break-even point.
Lowering Fixed Costs
Fixed expenses prove difficult to change. You might have to move to a smaller office space, cut services, lower administrative salaries, or cut staff and outsource some services to more efficient organizations that can get the same results for less money.
Don't cut these expenses so much that your ability to function gets hampered, but do watch fixed costs like a hawk to keep them low and lean.
Make Sales More Efficient
You make your sales more efficient by cross-selling, upselling, and getting referrals and sales leads from customers.
- Offer service or product bundles to convince customers to spend more money.
- Create attractive accessory options to increase sales volume.
- Ask customers to recommend you to friends and associates. You might offer product discounts for referrals.
- Try to motivate your sales force by giving bonuses for meeting certain sales targets.
Your Break-Even Point Will Change with Evolving Market Conditions
I recommend that you periodically review your figures and adjust your break-even point to reflect changes in prices, the economy, competitors' responses, and other factors. Update your figures to stay on top of market changes and make adjustments as needed.
Knowing and managing your break-even point is an ongoing job you perform in your role as manager of your business. It goes hand-in-hand with budgeting and cash flow management. Handle it well and stay on top. Neglect it and you could end up underwater. Hopefully these tips and insights will help you grow your business through ever-changing times and markets.
Suggested Resource: Would you like to know more ways to maximize profits and the value of your business. And specifically to turn it into one that exceeds $10 million in revenues? Then check out Growthink's 8 Figure Formula. This video explains more.