| Definition of Break-Even:The Break-Even point in | | | | A Location |
| sales volume is defined as:"That point in sales | | | | A Department |
| volume, or revenue, where direct costs have | | | | A Store |
| been recovered, fixed overhead expenses have | | | | A Product |
| been absorbed and where profit begins".We can | | | | A Product Line |
| relate Break-Even Point to the information in our | | | | A Service |
| financial statements, particularly the Income | | | | A Day |
| Statement. The Income Statement should be | | | | A Week |
| organized into the following sections:1. | | | | A Month |
| RevenueThe sum of all sales and other income | | | | A Year (or any other time period)This is |
| net of returns and sales commissions.2. Cost of | | | | assuming, of course, that fixed costs can be |
| Sales (Cost of Goods Sold)The cost of purchases | | | | accurately or, at least, reasonably associated with |
| that are resold (merchandise) and/or raw | | | | the organizers above.Using Break-Even in |
| materials plus the costs of labor to manufacture | | | | Modeling:The Break-Even formula can be used as |
| the product or convert it or install it or deliver it | | | | a model to estimate the effect of major |
| or construct it on site. These costs are also called | | | | decisions on the financial status of the business |
| direct or variable costs.3. General & Administrative | | | | such as adding a new location, making a capital |
| Costs (Overhead)These are all the costs not | | | | investment, dropping or adding a product line. |
| directly, or easily, related to sales volume such as | | | | Simply estimate the changes in fixed and variable |
| Advertising, Bank Charges, Computer Expenses, | | | | costs (and sales) that result from the decision and |
| Insurance, Office Wages & Salaries, Officer's | | | | plug them into the Break-Even formula for your |
| Compensation, Telephone, Utilities, Depreciation, | | | | company. This can also help you set goals for the |
| Interest, Taxes etc. These costs are also called | | | | new operation.In fact, ANY significant |
| indirect or fixed costs.4. 1 minus 2 minus 3 = | | | | contemplated change in your cost structure |
| PROFIT.Note: If your Income Statement is not | | | | resulting from a proposed decision can be |
| organized in this fashion (called managerial | | | | modeled to determine the effect on the |
| accounting format), you need to have a session | | | | company's financial results before the decision is |
| with your accountant and demand it be put into | | | | made. You will know what you face and are |
| this format so you can manage the business | | | | required to overcome ahead of time. You will be |
| better.Once you have your financial statements | | | | able to set goals based on financial facts rather |
| and data in the right format, you can easily | | | | than intuition only.Robert A. Normand is Executive |
| calculate Break-Even using the following formula | | | | Director of the Institute for Small Business |
| as:Break-Even Point = FC/(1-VC/S)Where: FC = | | | | Management ( and author of "Entreprenewal!, The |
| Fixed CostsVC = Variable CostsS = SalesFor | | | | Six Step Recovery Program for Small Business" ( |
| illustrative purposes, let's look at an example | | | | Mr. Normand has served as principal management |
| company, Acme Specialties that has the following | | | | consultant for more than 100 businesses ranging |
| data from its Income Statement:Sales = | | | | from $500,000 to $50,000,000 in annual sales and |
| $1,000,000Cost of Goods Sold = $710,000General | | | | has owned and operated several small businesses |
| & Admin = $215,000Acme's Break-Even Point | | | | of his own in diverse industries. Mr. Normand's |
| (during the period indicated by the income | | | | small business philosophy is premised on the belief |
| statement) is:Break-Even Point = FC/(1-VC/S) | | | | that small business management skills can be |
| andVC/S = 710,000/1,000,000 = .711- VC/S = 1 - | | | | developed by busy entrepreneurs using readily |
| .71 = .29FC/(1-VC/S)= 215,000/.29 = $741,379 = | | | | available information, tools and procedures not |
| BEPAnd the company operated at $1,000,000 | | | | found in business schools or formal degree |
| 741,379 = 135% of Break-Even during the | | | | programs. He can be reached by telephone at |
| period.Break-Even can be calculated for:A | | | | 941-330-0889 or by mail at 3751 Almeria Avenue, |
| Company | | | | Suite A4, Sarasota, Florida 34239. |
| A Division | | | | |