Breakeven point
This shows the level of sales that are needed in order to meet the costs
of the business. An alternative way of looking at this is “What gross
profit needs to be made in order to meet the overheads of the business?”
Without achieving this minimum level of sales and gross profit, no profits
will be generated – the business will operate at a loss.
Breakeven percentage
This shows the breakeven point as a percentage of the budgeted sales. It
is a very powerful ‘thermometer’ in assessing the ‘health’ or risk of a
business. The following rule-of-thumb scale can be used for analysing the
breakeven percentage
- over 90% - suicidal!
- 90%-80% - vulnerable
- 80%-70% - strong
- 70%-60% - very strong
- under 60% - exceptional
Note that a business with a breakeven percentage of over 80% is unlikely
to receive an enthusiastic welcome from a bank or other funder.
Breakeven time
The breakeven percentage projected can be converted into time. For
example, a percentage of 88% equates to 10.56 months. Therefore, if a
business starts its year on 1 January, it will not be breaking even until
17 November! This assumes that the sales levels are reached, the gross
margin is achieved and the overheads are on plan. Not a very comfortable
position to be in! |
Example
| |
| Sales |
£1,000,000 |
£1,000,000 |
| Cost of Goods Sold |
£750,000 |
£600,000 |
| Gross Profit |
£250,000 |
£400,000 |
| Overhead Expenses |
£200,000 |
£350,000 |
| Net Profit |
£50,000 |
£50,000 |
| |
|
|
| Breakeven Point |
80% |
87.5% |
| Breakeven Date |
18th October |
15th November |
The above example demonstrates why Company A is in a better position
than Company B, although both are making a profit of £50,000 on sales of £1
million. Assuming a calendar accounting year: Company A will breakeven by
18 October, whereas Company B will not break even until 15 November.
Company A has more variable costs (cost of goods sold) and less fixed costs
(overheads). |
