| Definition of Break-Even:The Break-Even point | | | | |
| in sales volume is defined as:"That point in | | | | A Store |
| sales volume, or revenue, where direct costs | | | | |
| have been recovered, fixed overhead expenses | | | | A Product |
| have been absorbed and where profit | | | | |
| begins".We can relate Break-Even Point to the | | | | A Product Line |
| information in our financial statements, | | | | |
| particularly the Income Statement. The Income | | | | A Service |
| Statement should be organized into the | | | | |
| following sections:1. RevenueThe sum of all | | | | A Day |
| sales and other income net of returns and | | | | |
| sales commissions.2. Cost of Sales (Cost of | | | | A Week |
| Goods Sold)The cost of purchases that are | | | | |
| resold (merchandise) and/or raw materials | | | | A Month |
| plus the costs of labor to manufacture the | | | | |
| product or convert it or install it or | | | | A Year (or any other time period)This is |
| deliver it or construct it on site. These | | | | assuming, of course, that fixed costs can be |
| costs are also called direct or variable | | | | accurately or, at least, reasonably |
| costs.3. General & Administrative Costs | | | | associated with the organizers above.Using |
| (Overhead)These are all the costs not | | | | Break-Even in Modeling:The Break-Even formula |
| directly, or easily, related to sales volume | | | | can be used as a model to estimate the effect |
| such as Advertising, Bank Charges, Computer | | | | of 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. These | | | | adding a product line. Simply estimate the |
| costs are also called indirect or fixed | | | | changes in fixed and variable costs (and |
| costs.4. 1 minus 2 minus 3 = PROFIT.Note: If | | | | sales) that result from the decision and plug |
| your Income Statement is not organized in | | | | them into the Break-Even formula for your |
| this fashion (called managerial accounting | | | | company. This can also help you set goals for |
| format), you need to have a session with your | | | | the new operation.In fact, ANY significant |
| accountant and demand it be put into this | | | | contemplated change in your cost structure |
| format so you can manage the business | | | | resulting from a proposed decision can be |
| better.Once you have your financial | | | | modeled to determine the effect on the |
| statements and data in the right format, you | | | | company's financial results before the |
| can easily calculate Break-Even using the | | | | decision is made. You will know what you face |
| following formula as:Break-Even Point = FC | | | | and 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 illustrative | | | | financial 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 data | | | | of 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's | | | | Business" ( Mr. Normand has served as |
| Break-Even Point (during the period indicated | | | | principal management consultant for more than |
| by the income statement) is:Break-Even Point | | | | 100 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 company | | | | in diverse industries. Mr. Normand's small |
| operated at $1,000,000/741,379 = 135% of | | | | business philosophy is premised on the belief |
| Break-Even during the period.Break-Even can | | | | that small business management skills can be |
| be calculated for:A Company | | | | developed by busy entrepreneurs using readily |
| | | | available information, tools and procedures |
| A Division | | | | not found in business schools or formal |
| | | | degree programs. He can be reached by |
| A Location | | | | telephone at 941-330-0889 or by mail at 3751 |
| | | | Almeria Avenue, Suite A4, Sarasota, Florida |
| A Department | | | | 34239. |