Breakeven point in any business can be explained as the level of Revenue, when Cost is equal to revenue. That's why it is also called a point of no profit no loss.
It's an important tool for any business or outlets whether new or running from ages to ascertain the 'Break-even-point' of outlet or activity.
It provides a minimum production or sales target to Managers to maintain business above 'red line'.
Team Members need to be communicated, well in time
Managers need to calculate and re-calculate 'Break-even-point' each month as all of us are aware of fact that the nature of business is fluid and it's profitability changes shape even with slight change in any strategy or activity. Each month or period, Break-even of any outlet or organisation changes which impact the margin.
It is imperative to operate a business with higher margins, and Break-even point calculations play an important role in it. Technically speaking, if we want to achieve higher margins then Break-even point need to go as lower. Thus all the periodic change in Break-even point need to be communicated to Team members because they are key to any successful business and more informant they are means business operates more smoothly.
Its a regular practice of any successful business to communicate and update changes in operating activities of business.
Communication is key of successful business
We can take example of latest COVID-19 situation where even a smooth running business faced the roughness. Let's say a coffee shop was selling butter muffins and making a decent profits but after COVID-19 lockdown opens up, Coffee shop sale of muffins reduced because people do not want to spend extra. Although the sale of coffee intact. With this change in business model, monthly profitability impacted and thus changed the 'Break-Even-point' of outlet.
Why? because of fixed cost such as rent, payroll, utilities etc.
Coffee shop either need to sale more coffees or start 'discounting' to maintain the profitability. and of course, this has changed the 'Break-even-point' which need to be communicated to team members.
The Manager to communicate to his team members need - the number of coffee to be sold each day to maintain outlet in profit. This can be done only if Break-even is calculated regularly and communicate to their team.
Team members need to aware - the minimum selling target, to reach where all the cost & expenses are paid off and any revenue generated over that point will give return to Owners and Investors.
We all know that Investor's world roam around ROI or Return of Investment. and to reach ROI, first any business unit need to reach BEP or Break-even-point.
Calculate Break-Even point
To calculate Break-even point, first job is to ascertain fixed expenses of business. Few expenses are of variable nature for certain kind of business whereas similar expense may be of fixed nature for another business.
Simple example is 'rent or lease' charges, mostly considered as fixed for a month or certain period. However, there are few companies operating their outlets or business based on variable lease cost. Lease or rent is based on percentage of revenue generated by outlet for example Rent can be 'fixed' at 15% of monthly revenue so although the percentage is fixed but nature of expense is variable. That's the reason, each business unit need to divide expense based on 'fixed' or 'variable' nature. It change the overall calculation and if 'fixed' expenses are not ascertained carefully, the whole exercise of calculating Break-even-point will be waste. Team will be chasing a 'unreal' goal.
Once fixed portion of outlet is ascertained then we need to calculate Gross Operating Margin of business which is also called 'contribution'.
Contribution% = (Revenue - Variable Cost)/100
once Gross operating margin or Contribution percentage is calculated, divide Fixed cost with Contribution percentage to get Break-even revenue.
To understand in detail, my presentation on Break-even-point can be downloaded
Now the time to calculate Break-even for your business and the sales strategy to be revolve around it.... if you need any help then send me message to explain you further...... Good Luck!!!
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