Revisit Your Break-Even Each Month and Reset Your Sales Goals Each Time.
By James Chittenden
Expenses change all the time, and therefore the revenue you must earn to pay them changes too. “Break-even analysis”, also known as ”break-even” is a misunderstood term, and means different things to different people. The path to increasing your profits goes through your break even. Revisit your break-even each month and reset your sales goals each time. Your break-even is the point at which your revenues equal both your fixed and variable costs.
Fixed Costs are Never Really “Fixed”
“Fixed” costs are widely misunderstood. They must be paid by a company regardless of sales. They include rent, insurance, phone, internet, salaries, and other regular, recurring costs. The amounts of some of these costs may stay constant for a period of time due to leases or other contracts. However, keep an eye on these monthly bills, as you may not always receive notice of changes.
Variable costs rise and fall with sales. They include items such as parts, ingredients, labor, or transportation expenses. Since sales cannot be accurately forecast, neither can the costs associated with those sales.
Add up all of your fixed costs, and update it each month. Watch your bills and account for increases or decreases in your phone bill, rent, salaries, insurance, etc. Use this business budget calculator or free template to track these costs, and easily carry them over from month to month.
PRO TIP: “Miscellaneous” is a line item and the amount should be as high as possible. This should cover unexpected expenses. If you budget for $500 in miscellaneous costs and earn the revenue to cover it, whatever is not used becomes operating profit.
PRO TIP: Be liberal when predicting expenses, and be conservative when predicting sales. Think of “thirds”. Take all of your meticulously planned expenses. Now triple them. Now imagine your best marketing projections of first year sales. Reduce that to about 1/3 of what you planned.
If you can still make a profit, consider the plan workable.
We have created a book that walks you through expenses of operating your business, complete with fillable pages. There are many other costs and not all of these will account for your unique situation.
If you are trying to figure costs, see Small Business Cost Helper and the One Click Advisor Business Builder.
Set a profit goal for the month. How many dollars would you like in your pocket at the end of the month? How much would you like to re-invest in your business? Whatever that is, add it to your fixed costs.
Yes. Treat your profit like a fixed cost. That way you can set sales goals that help you provide for all the money you need to pay your bills and take home some profit.
For example, Joe owns a coffee shop with fixed costs of $10. Joe would like to make a $5 profit. Joe should plan to sell enough coffee to have $15 at the end of the month.
Set sales goals that cover all fixed and variable expenses. In order to do that, you need to know what margin you need to collect.
In this video, you will learn exactly how to set your goals and meet them, including profit:
MANAGE PRICES BY MARGIN, as opposed to simply setting markups. For an explanation of markup vs. margin, see here and watch the videos.
If you are a service business and not a retail business, you still have costs that include the hourly rate of yourself and employees, along with costs of travel, laptops, or other expenses. Set margins in accordance with your industry. Learn more here. Margins for professional services have averaged 30 percent in recent years.
Welcome to One Click Advisor! We would be remiss if we didn’t give you a brief tour of the site and what it can do for you. The free Business Builder is a consulting session, solving your business plan questions in minutes. Your challenges and opportunities can be sorted into one of three areas.
Marketing, because it brings in the customers. Start or continue that plan here.
Operations, because it keeps your customers. Start or continue that plan here.
Finance, because it is the scoreboard and because to keeps you paid. Change the “score” and explore financing here.
Revisit your break-even each month and reset your sales goals each time. yourself to your industry so that you can meet or exceed your profit goals.