Understanding your business breakeven point is essential to know how much money you need to make to stay in business.

It can therefore help you make well-informed financial decisions and practical business plans.

The breakeven point is the income or sales needed to cover all costs. Any earnings above this point generate profit. So your breakeven point tells you the minimum sales required to continue operating a viable business.

Understanding the breakeven point in conjunction with financial reports can give you valuable data to analyse fixed and variable costs and set sales targets for the business or individual staff members.

Fixed and Variable Costs

• • • Fixed costs – remain the same regardless of how many sales you make. Expenses like rent, equipment lease repayments or full-time staff have to be paid whether you sell any goods or services or not. Fixed costs are often called overheads.
    • Variable expenses – (sometimes called production costs) fluctuate based on sales. For example, cost of goods sold, production labour, and commissions paid to salespeople will vary according to the number of goods or services sold.

It’s helpful to work out an amount or percentage of variable costs compared to the sale price of your products or service. This may not be exact initially, but even if you get a rough figure to work with, this will help calculate your breakeven point. Over time as you analyze your financial reports, you’ll be able to refine the calculation and adjust your selling price accordingly.

How to Calculate Breakeven

You’ll need to know your fixed costs (overheads), selling price and production costs.

One common method of calculating breakeven is as follows: 

Overheads / (selling price – production cost)

For example, let’s say overheads per month (rent, vehicle lease, administration staff) are $20,000, and you sell a coaching program for $3,000 with variable costs (coach fees, handout materials for participants, advertising) of $1,500 per program.

$20,000 / ($3,000 – $1,500) = 13.33

You would need to sell over 13 programs per month to break even, which equates to $40,000 worth of sales.

If the same program had variable costs of $1,800, you would need to sell 17 programs per month to generate $50,000 worth of monthly sales just to cover costs. Variable costs of $1,000 per program would mean you only need to sell 10 per month to break even.

With these examples, you can see how important it is to understand your fixed and variable costs. Then you’ll know exactly how much you need to make to remain in business and the resulting impact on your financial position.

Once you have a reasonably accurate breakeven figure, you can quickly calculate your profit before tax for sales above the breakeven point. In the example where variable costs are $1,500 per program, let’s say you sell 20 programs each month. This would result in an extra $10,000 in profit (before tax) after paying for overheads and variable costs.

Can breakeven help with your pricing?

Understanding your breakeven point can give you some deep insights into your selling prices, helping you understand if they’re realistic.

For example, if your variable costs are high, how much more income will you need to reach breakeven. Is there a fair price for consumers that covers your expenses in a reasonable time frame? Do you need to raise prices to account for fixed and variable costs accurately?

Talk to us about calculating your breakeven point

There are different ways of calculating your breakeven point to confirm the viability of your business, and the ideal pricing point for driving both sales and profitability.

We’d love to help you understand your business financials in more depth, so you can plan for long-term sustainability, enjoyment and profitability.

The following content was originally published by BOMA. We have updated some of this article for our readers.

The foundational goal of any business is to make a profit.

As a business owner, that’s one of your key financial aims – to make enough sales, at a big enough margin, to generate profit from your enterprise. But how does profit differ from cashflow? And why is cash king?

How do profit and cashflow differ?

To really understand the difference between generating profit and managing cashflow, we need to look at what both these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cashflow is an invaluable business skill.

Let’s take a look at the differences:

• • • What is profit? – Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills and tax etc. It’s driven by creating a profit margin and generating value from your products and/or services.
    • What is cashflow? – Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials etc.

Why is positive cashflow so important?

‘Cash is king!’ may be a cliche these days, but it’s a maxim which underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cashflow then the business may not survive as long as the end of the year.

What’s needed is good cashflow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.

A business can generate high revenues and big profits, but still be cashflow poor. In other words, it can have profits at the end of the period, but have very little liquid cash to fund it’s day-to-day operations over the course of the period.

Talk to us about improving your cashflow management

Good cashflow management is all about being in control of your cash inflows (income you’re generating) and your cash outflows (what you’re spending). To achieve ‘positive cashflow’ you need to proactively work to keep your inflows higher than your outflows.

As your adviser, we’ll help you set up detailed cashflow reporting and forecasting, so you can keep the business in that ideal positive cashflow position. And we’ll also look at key steps for keeping your revenues high, margins profitable and meeting your financial targets.

Get in touch to talk through your cashflow management.

The following content was originally published by BOMA. We have updated some of this article for our readers.

Starting a business can be a challenging experience, especially when it comes to managing your numbers and staying on top of your financial management.

Unless you’ve got some experience in finance, the bookkeeping and accounting requirements can be quite daunting. And even with today’s helpful cloud accounting platforms and fintech apps, there’s always the possibility of making a simple accounting mistake.

So, what are the most common accounting mistakes made by business owners? And what can you do to avoid these pitfalls and keep your finances looking healthy and shipshape?

The top five accounting mistakes to avoid

‘Doing the books’ is unlikely to be your favourite part of running a small business. But the better your accounting know-how and skills, the more oversight you have over the financial path (and future success) of your company. It really is that simple.

But there are plenty of traps that a newbie owner can fall into – and even a few hurdles that the more experienced business owner may trip over from time to time.

Let’s take a look at the five most common accounting mistakes:

1.   Mixing your personal and business finances

When you don’t separate your personal and business transactions, this blurs the lines and makes it difficult to track your income and expenses accurately. It can also lead to personal spending being counted as business deductions, causing tax issues later on.

Solution: Open separate business and personal bank accounts and keep them entirely separate and distinct.

2.   Skipping the record-keeping process

If you fail to keep receipts, log your invoices and keep proper records this can be a major problem further down the road. Detailed records are crucial for tax filing, budgeting and identifying spending trends.

Solution: keep digital copies of all receipts and be sure to keep your bookkeeping up to date and well-managed.

3.   Miscategorising your expenses

Throwing all your expenses under ‘miscellaneous’ makes it far harder to analyse your spending and cashflow. With every item of expenditure logged under a specific code from your Chart of Accounts, you can quickly run reports, review your spending and look at ways to improve budgets and cashflow.

Solution: Categorise your expenses properly (rent, marketing, supplies etc.) to understand where your money goes.

4.   Winging it when filing your taxes

Taxation is complicated and it’s easy to make costly mistakes if you’re not prepared and organised. Don’t wait until tax season to sort everything out and make sure you’re aware of all your business tax liabilities.

Solution: Set aside funds for taxes throughout the year, and consider consulting an accountant or tax adviser to ensure you’re filing correctly and taking advantage of all potential government deductions and tax incentives.

5.   Failing to get proper accounting advice

If managing your finances becomes overwhelming, don’t be a hero. Cloud accounting software can automate some of the key tasks, and a bookkeeper can handle day-to-day record-keeping.

Solution: think about outsourcing and partnering with an experienced accounting firm to get real peace of mind and improved financial management.

Talk to us about outsourcing your key accounting tasks

You didn’t start your business to spend hours working on your bookkeeping and accounts. Why not outsource your key accounting tasks to us, and put those hours back into your business.

As your accounting partner, we can:

• • Show you how to clearly separate your personal and business finances
  • Set up your bookkeeping to be as streamlined, automated and efficient as possible
  • Show you the best software tools and processes for managing your expenses
  • Become your tax agent and take care of all the complex tax filing tasks
  • Provide reporting, management information and advice to guide your decision-making

Get in touch to talk about outsourcing your finance tasks

The following content was originally published by BOMA. We have updated some of this article for our readers.

If you are ‘pressing go’ on your new business, what are the key elements to have in place before you begin trading?

The complexity of your operational model will vary greatly, depending on the kind of business you’re setting up. A small two-person design agency will have a simpler operational set-up than a wholesale food production business, for obvious reasons. So, this stage of the journey is about pinning down those key operational needs and getting an effective strategy together for how this business is going to work, in the real world.

Find your premises or workspace

Every business needs some kind of workspace, whether it’s your own home, an office or a factory space. This is the place where the actual work will be done and the central hub of your operations, so put some careful thought into what space will be needed. In terms of location, the type of business will also dictate whether you can be based where you are, or should you be where your customers are.

Our two-person design agency could feasibly operate from a co-working office, a startup incubator space or from a spare room/garage/summer house in the founder’s home. The wholesale food production business, however, will need factory space to house it’s production equipment, a chilled store for the food, an office for the admin staff and managers, and space for delivery vehicles and incoming supplier deliveries etc.

Buy your equipment and tech

You’ll have set aside some of your initial funding to buy the basic equipment and technology needed for the business. This will include all the machinery, plant, office furniture, IT, computing and telecommunications equipment required to run the business, plus any vehicles you’ll need.

Once you have your premises ready to roll, you can start moving your equipment in and actually ‘setting up shop’ in your brand new workspace.

Source your key suppliers

Most businesses will rely on some form of supply chain to keep the business ticking over. The design agency will probably need paper, printer ink and (no doubt) a lot of coffee to stay operational. And our food production business will need raw ingredients, cardboard boxes and product packaging to be able to produce their key products.

Your next step is to source the suppliers you need and set up contracts with these external companies. You may have pre-existing contacts in the industry, or you may be starting with a clean slate. Either way, it’s important to build up a trusted supply network, where you’ve negotiated a good price and decent payment terms. Ultimately, your business can sink or swim based on the stability of your supply chain, so these relationships will be crucial to your success.

Get the logistics and delivery elements in place

Getting the finished product/service to your end customer is the main goal of any business, so the final piece of your operational puzzle will be sorting out your logistics and delivery systems.

For a small service-based startup, like the design agency, the end offering is likely to be either wholly digital or a mix of print and digital. The end delivery process is relatively straightforward and will mostly consist of getting the final signed-off assets to the customer. For a complex manufacturing or production startup, like the food business, the delivery systems will be a vital part of their offering. As a food business, you’ve got to meet all relevant food hygiene timescales and standards, and get your fresh, high-quality food products safely to your customers.

A delivery system should be customized to each company’s specific needs, so it’s sensible to put plenty of thought into making this system efficient, cost-effective and productive.

If you’re at the early stages of planning out your business idea, please do get in touch. We’ll help you get your operations in order and properly aligned with your business model.

Talk to us about your startup plans.

The following content was originally published by BOMA. We have updated some of this article for our readers.

As a business owner, you want to make the best possible decisions for your business.

The choices you make regarding strategy, spending, revenue generation and cashflow management can all have a major impact on the long-term future of the company.

So, how do you give yourself that competitive edge when it comes to decision-making?

The answer is to make the most of your financial data and to use the outputs from today’s cloud accounting tools and finance apps to inform and guide your choices as a leader.

Five major benefits of having financial real-time data

Cloud accounting has revolutionized the ways that small business owners manage their business accounts and broader financial management.

With the right tech stack and cloud accounting software, it’s possible to have genuine real-time information about your business finances. That instant access to your financial performance numbers is a game-changer, for a number of reasons.

Here are five ways that deep financial data can help to drive your business success…

Real-time data gives you:

1. Informed decision-making – with access to the most up-to-date financial data, you’re no longer flying blind! Real-time data empowers you to make strategic decisions based on the most current business information. You can see how marketing budgets are performing, analyze your sales trends and identify areas for cost-cutting – with a dashboard that provides a real-time snapshot of your overall financial health. You’re informed, on the ball and can react like lightning to any pressing business opportunities, or unplanned threats to your funding and operating cashflow.
2. Improved cashflow management – cash is king, so it’s crucial that you have the best possible insights into your cashflow position, planning and management. Real-time cash data helps you plan for upcoming expenses, predict potential shortfalls and make informed decisions about borrowing or investment strategies. This real-time visibility ensures you always have sufficient funds to cover your operational costs, dodging the cashflow pitfalls that could otherwise hinder your business growth.
3. Enhanced budgeting and forecasting – you can ditch the static spreadsheets and embrace a more dynamic, real-time way to run your budgeting and forecasting. Track your progress towards financial goals, identify variances and deviations from key budgets, and adjust your plans and strategy accordingly. Accurate historic and real-time data also means more accurate forecasts, leading to better resource allocation and improved financial planning for the future.
4. Increased potential to turn a profit – with access to real-time data, finding the prime areas for cost reduction and revenue optimization is made easy. You can quickly hone in on the products that are bringing in the biggest sales revenues, or the operational expenses that are costing you money but failing to deliver a healthy return on investment (ROI). If the majority of your sales income is coming from one product, by tracking key metrics like customer acquisition costs and conversion rates, you can identify and refine marketing strategies to maximize return on investment. Additionally, real-time sales data allows you to react quickly to customer trends and adjust pricing strategies to improve profitability.
5. Greater confidence in your business potential – modern accounting tech puts all this real-time data right at your fingertips, so you always feel in control of your finances. That’s a major boost to your confidence as a business owner, giving you the overview and insights you need to keep a tight grip on your financial health. Having this transparency makes it possible to share key metrics with your key stakeholders, like investors or partners. It also demonstrates your commitment to keeping good records and focusing on your financial management – a trait that investors, lenders and banks will see as a good sign of the viability of your business.

Talk to us about accessing your finance data goldmine

If you’re currently only tracking the most basic of finance metrics, now’s the time to dive deeper into your pool of valuable financial data. The more detailed and refined your finance dashboard becomes, the more you’re in control of the next steps of your business.

We can help you set up a tailored business dashboard and management reporting tools to track all the most valuable finance metrics for your business.

Get in touch to start exploring your real-time data

The following content was originally published by BOMA. We have updated some of this article for our readers.