When’s the last time you did a breakeven analysis on your company?

What is a breakeven analysis? It's not just for manufacturing companies, it can be used in all industries with slight changes to the variables used to compute it. 

Breakeven analysis is when you take all of your fixed costs and your gross profit percentage and apply that to a dollar value to figure out how many sales or units you need to have in order to break even for the time period in question. The time period you choose is completely up to you. It can be how many sales in a day, a week, a month or any time period that makes sense to you. If your business is very cyclical, you might only have sales during certain months out of the year, but some of your fixed expenses continue on a monthly basis. That would change the calculation.

Recently, I did a breakeven analysis for a client of mine and it really opened the eyes of the business owners to understand how many sales they have to do each and every day. Of course, it’s unrealistic to expect to reach that goal every single day, because some days you’ll have none and other days you’ll receive ten times what your daily sales amount needs to be.

The point is, with a breakeven analysis, you’ll know what that amount is so you use that information to your advantage.

Fixed expenses such as insurance, rents, etcetera, remain the same. Personally, the way I do a breakeven analysis is a little bit different than the way that typically a breakeven analysis is done. I additionally take some of the regular costs that are deemed to be variable expenses and include those as fixed expenses only because, even though they vary from month to month, the average of them is still somewhat manageable. You can treat them as a fixed expense is most cases.

If you haven't done a breakeven analysis and your company is in need of one, I suggest you have it done. If you don't have somebody that knows how to do that, then please talk to your accountant or contact us.