Break-even Sales Analysis: Every business owner should know how much revenue is needed to allow the company to pay all business costs and leave the owner a fair profit return. Profit is determined by the company's cost structure and sales volume over the course of one year.
Cost Structure: Background “Fixed” Costs - Business expenses that are independent of the level of sales are classified as “fixed” costs (FC). It’s important to understand the term “fixed” does not mean the cost can not be changed. For instance, lease payments (building, equipment, fixtures, etc.) are examples of business costs that must be paid whether the company has a big sales month or a slow one. The lease holder may hope your business does well but when it comes time to pay the rent, your sales success is of no concern. Other types of “fixed” costs generally include insurance premiums, membership fees, repairs & maintenance, loan payments, professional fees, etc. Salaried employees usually are considered fixed costs. “Variable” Costs - Business expenses that change as the level of sales change are known as “variable” costs (VC). If a company sells and installs carpet and tile, the purchased flooring materials are “variable” costs. As the company’s sales volume grows, the amount of materials purchased also increases. Materials purchased tend to be the largest cost category in many businesses representing 30% to 80% (or more) of every sales dollar. Other examples of “variable” costs include freight costs, sales commissions, supplies (shop, store and office), credit card fees, etc. Hourly employees often are counted as variable costs. “Semi-Variable” Costs - Many business costs possess both “fixed” and “variable” characteristics. So how do you know which is which? One rule of thumb is to imagine ... if the business were closed for 4 or 5 weeks, would a particular cost go away or decrease significantly? You would still have the rent to pay but you wouldn’t continue the full hourly payroll. A business closed for 4 weeks would still have telephone costs in the monthly service charge whil long distance charges would fall to zero. Gas and electric costs may drop substantially during this 4 week period but wouldn’t go completely For the Next 12 Months … away. Some advertisements are fixed costs (yellow page ads) while$others are variable depending on the volume of sales. 1. Estimate Sales - from all business sources - what is your goal? It's okay to estimate how much of a semi-variable cost is “fixed” and how much is "variable". Always use the best 2. Net income - available. reward - what is your goal as a % of sales? information this is your For example, advertising in your business maybe 30% fixed and 70% variable.
Net Income $0
3. Business Costs - Estimate all business costs (cash) for the next 12 months and classify them as "fixed" or "variable". If a cost contains both fixed and variable charcteristics, allocate the total cost appropriately.
Total Costs
Materials Purchased $ Freight charges Supplies - Shop / Store Payroll This is why Payroll Taxes Insurance you're in Rent: Equipment business. Building Rent / Mortgage Utilities Telephone / Fax Advertising & Promotion Vehicle Expense Computer / Internet Travel & Entertainment Repairs & Maintenance Office Supplies Postage Freight-out Professional Fees Dues & Subscriptions Donations Bad Debt Expense Bank Charges - credit cards Taxes (other than sales) License & Fees Loan Payments Other
Fixed Costs
Variable Costs
Income
Total Expenses
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Break-even Sales Analysis Step 1: Variable Costs as a % of Sales #DIV/0! Step 2: Calculate "Break-even Factor" #DIV/0! Step 3: Estimate Break-even Sales Volume #DIV/0! PROOF: B-E Sales Volume less Fixed Costs less /Variable Costs Profit & Sales Analysis Step 1: Add Profit Goal ($) to Fixed Costs $0 Step 2: Calculate Sales Volume $0 #DIV/0! #DIV/0! #DIV/0! PROOF: Profit Sales Volume less Fixed Costs less /Variable Costs = Profit Goal #DIV/0!
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#DIV/0! $0 #DIV/0! #DIV/0! #DIV/0!