OPERATING A SUCCESSFUL BUSINESS BREAK EVEN CALCULATION. Paper CONTENTS

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Godwin Mathews
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1 OPERATING A SUCCESSFUL BUSINESS BREAK EVEN CALCULATION CONTENTS Page 1. Definition Of Fied Epense Variable Costs Sales Needed Depend On Gross Profit Percentage Typical List Of Epenses Calculation Of Sales Assumptions Relating To The Calculations... 4 Page 1

2 OPERATING A SUCCESSFUL BUSINESS BREAK EVEN CALCULATION 1. Definition Of Break even sales is the level of sales necessary to cover all variable and fied epenses i.e. the point of no profit or loss. 2. Fied Epense A fied epense is an epense which does not vary relative to production or turnover within reasonable production or sales levels e.g. rent is normally considered a fied epense until such time as the physical capacity of the space being rented is ehausted, at which stage rent would have to be increased because larger premises would have to be obtained. Management salaries can be treated the same way. For the present work force and reasonable additions to it the current management team can probably handle that production, but if production is to be increased beyond that reasonable epectation, then additional costs will be incurred at that stage. 3. Variable Costs Variable costs vary normally directly in relation to increases in production or sales of a business. 4. Sales Needed Depend On Gross Profit Percentage The sales needed to achieve break even depend on the gross profit percentage that has been obtained from those sales. For eample: Sales of $100,000, with a gross profit percentage of 50%, generates $50,000 to cover the fied and variable costs. However if the gross profit percentage was 30%, then only $30,000 has been generated to cover fied and variable epenses. Page 2

3 5. Typical List Of Epenses Epense Fied Variable Total Epense Epense $ $ $ Accountancy Fees 4,000 4,000 Advertising 40,000 40,000 Bank Charges 2,000 2,000 Cleaning 3,000 3,000 Depreciation - Plant & Equipment 5,000 5,000 Electricity 5,000 5,000 Entertainment 1,000 1,000 Freight Out General Epenses ,000 Insurance 5,000 5,000 Interest 3,000 3,000 Lease Payments 20,000 20,000 Laundry Motor Vehicle Epenses 5,000 5,000 Maintenance Agreements 2,000 2,000 Operating Epenses 3,000 3,000 Printing & Stationery 1,000 1,500 2,500 Rent 50,000 50,000 Subscriptions 1,000 1,000 Superannuation 4,500 4,500 Telephone 2,000 2,000 4,000 Travelling & Accommodation 4,000 4,000 Salaries 75,000 75,000 Wages 345, ,500 WorkCare 1,250-1,250 $195,750 $392,000 $587, Calculation Of Sales If the business was achieving a 32% gross profit percentage on sales, then the sales figure would be:.1 Total Epenses: Divided by Gross Profit Percentage 100 $587, Multiplied by = = $1,836,718.2 Proof: Sales $1,836,718 Gross Profit Percentage 32% Gross Profit $587,750 Epenses $587,750 Page 3

4 .3 If Gross Profit Percentage was 60% Sales would be $587, Sales $979,583 Gross Profit $587,750 Epenses $587,750.4 If Gross Profit Percentage was 40% Sales would be $587, Sales $1,469,375 Gross Profit $ 587,750 Epenses $ 587, Assumptions Relating To The Calculations These calculations are indicating that within the current typical operations of this business, there are costs of $587,750. Obviously this is based on management s decision as to the minimum salaries that have to be paid to effectively run the business and this has been set at $75,000. The wages of $345,500 have been treated as a variable epense. The key factors in calculating a break-even calculation are: Knowing the epenses of the business. Knowing the average gross profit percentage rate that can be achieved in the business. It is then a matter of dividing the gross profit percentage into the total epenses and multiplying by 100/1 to determine the sales level required to break even. Within certain limits, any sales over the break even sales figure will only need to cover the percentage applicable to variable epenses with the rest of the gross profit being available for bottom line profitability. Every business operator should know what the fied costs and unavoidable variable costs are going to be for them to open their doors and should also know their anticipated gross profit percentage so that the break even calculation at that level of operations can be determined. This will enable them to monitor their actual sales performance as against their break-even figure effectively motivating staff to achieve sales beyond the break-even figure. Page 4

5 AN IMPORTANT MESSAGE The forms and commentaries contained in this paper are provided as a guide only and should not form the sole basis for any advice in relation to the particular situation of any person without first obtaining proper professional advice. This paper is provided on the understanding that ESS BIZTOOLS Pty Ltd (ACN: ) will not be responsible as a result of any use made by users hereof of the forms or commentaries of this paper without first obtaining specific professional advice. Neither shall ESS BIZTOOLS Pty Ltd be responsible for any errors or omissions contained in these papers. ESS BIZTOOLS Pty Ltd epressly disclaims liability whether under contract or negligence and whether to a direct purchaser of these papers or to any other person who may borrow or use them in respect of any loss or damage flowing therefrom whether direct or consequential. In particular and without limiting the etent of this disclaimer ESS BIZTOOLS Pty Ltd accepts no liability if any form or commentary contained herein, whether used in its original form or altered in some way by the user, proves not to be valid or not to attain the end result desired by the user. This eclusion shall etend both to the user and to any client of the user who may suffer loss as a result of the use of these papers and it shall apply even though ESS BIZTOOLS Pty Ltd may have been negligent in the publication or preparation of these papers. The user acknowledges that it has not made known to ESS BIZTOOLS Pty Ltd any particular purpose for which these papers are required and that it has not relied on ESS BIZTOOLS Pty Ltd's skill or judgement to provide a paper suitable for any such purpose. INTELLECTUAL PROPERTY NOTICE The authority to use all copyright, trade marks and other intellectual property rights comprised in this paper is held eclusively by ESS BIZTOOLS Pty Ltd (ACN: ). Neither these rights nor any part of this paper may be used, sold, transferred, licensed, copied or reproduced in whole or in part in any manner or form whatsoever without the prior written consent of ESS BIZTOOLS Pty Ltd (ACN: ). Page 5

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