What is your break-even point? How many businesses have considered this in planning their sales strategy?
The break-even point is the level of sales that will earn a profit which is just big enough to cover the fixed costs of the business.
To illustrate this point by way of an example;
A business sells product A only, which has a mark-up on cost of 50%. There are no economies of scale in this business and each unit of product A costs the business $100.
The business is only small and the monthly costs of the business are:
|Commissions||5% of gross sales (ignoring GST)|
Break-even point (in units) is defined as Fixed Costs divided by marginal profit per unit. In other words, how many products have to be sold for their contribution to profit to be able to cover the Fixed Costs?
These are the costs of running the business that do not change in line with any change in the level of productivity / sales. In our example, the Fixed Costs will be Rent, Electricity, Telephone and Salaries – $5,600.
[In a more complex situation, costs such as telephone might have a variable component if sourcing customers relies on making phone calls – so it is important to fully understand the cost drivers of the business.]
Marginal Profit relates to the gross profit on selling the product / service less any variable costs associated with the sale.
|Selling Price per unit||$150|
|Cost Price per unit||$100|
|Gross Profit per unit||$50|
|Sales Commission (5%)||$5|
|Marginal Profit per unit||$45|
Break-even point = $5,600 / $45. 125 units (124.44) Units to break-even.
Once you have an understanding of your break-even point, if you have a good understanding of the sales trends in your business, you can figure out how long it will take to reach this point and it will also help to plan a sales strategy armed with this knowledge. This information will help you to develop a strategy to reach the profits required in the business.