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How to Calculate Your Break-Even Point and How to Use It

Definition of Break-Even:The Break-Even point
in sales volume is defined as:"That point inA  Store
sales volume, or revenue, where direct costs
have been recovered, fixed overhead expensesA  Product
have been absorbed and where profit
begins".We can relate Break-Even Point to theA  Product  Line
information in our financial statements,
particularly the Income Statement. The IncomeA  Service
Statement should be organized into the
following sections:1. RevenueThe sum of allA  Day
sales and other income net of returns and
sales commissions.2. Cost of Sales (Cost ofA  Week
Goods Sold)The cost of purchases that are
resold (merchandise) and/or raw materialsA  Month
plus the costs of labor to manufacture the
product or convert it or install it orA Year (or any other time period)This is
deliver it or construct it on site. Theseassuming, of course, that fixed costs can be
costs are also called direct or variableaccurately or, at least, reasonably
costs.3. General & Administrative Costsassociated with the organizers above.Using
(Overhead)These are all the costs notBreak-Even in Modeling:The Break-Even formula
directly, or easily, related to sales volumecan be used as a model to estimate the effect
such as Advertising, Bank Charges, Computerof major decisions on the financial status of
Expenses, Insurance, Office Wages & Salaries,the business such as adding a new location,
Officer's Compensation, Telephone, Utilities,making a capital investment, dropping or
Depreciation, Interest, Taxes etc. Theseadding a product line. Simply estimate the
costs are also called indirect or fixedchanges in fixed and variable costs (and
costs.4. 1 minus 2 minus 3 = PROFIT.Note: Ifsales) that result from the decision and plug
your Income Statement is not organized inthem into the Break-Even formula for your
this fashion (called managerial accountingcompany. This can also help you set goals for
format), you need to have a session with yourthe new operation.In fact, ANY significant
accountant and demand it be put into thiscontemplated change in your cost structure
format so you can manage the businessresulting from a proposed decision can be
better.Once you have your financialmodeled to determine the effect on the
statements and data in the right format, youcompany's financial results before the
can easily calculate Break-Even using thedecision is made. You will know what you face
following formula as:Break-Even Point = FCand are required to overcome ahead of time.
(1-VC/S)Where: FC = Fixed CostsVC =You will be able to set goals based on
Variable CostsS = SalesFor illustrativefinancial facts rather than intuition
purposes, let's look at an example company,only.Robert A. Normand is Executive Director
Acme Specialties that has the following dataof the Institute for Small Business
from its Income Statement:Sales =Management ( and author of "Entreprenewal!,
$1,000,000Cost of Goods Sold =The Six Step Recovery Program for Small
$710,000General & Admin = $215,000Acme'sBusiness" ( Mr. Normand has served as
Break-Even Point (during the period indicatedprincipal management consultant for more than
by the income statement) is:Break-Even Point100 businesses ranging from $500,000 to
= FC/(1-VC/S) andVC/S = 710,000/1,000,000 =$50,000,000 in annual sales and has owned and
.711- VC/S = 1 - .71 = .29FC/(1-VC/S)=operated several small businesses of his own
215,000/.29 = $741,379 = BEPAnd the companyin diverse industries. Mr. Normand's small
operated at $1,000,000/741,379 = 135% ofbusiness philosophy is premised on the belief
Break-Even during the period.Break-Even canthat small business management skills can be
be  calculated  for:A  Companydeveloped by busy entrepreneurs using readily
available information, tools and procedures
A  Divisionnot found in business schools or formal
degree programs. He can be reached by
A  Locationtelephone at 941-330-0889 or by mail at 3751
Almeria Avenue, Suite A4, Sarasota, Florida
A  Department34239.



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