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!

For your FREE no-obligation discussion of your business needs, contact Gordon on 01491-671710 or e-mail him on info@welsbyassociates.co.uk, or fill in the contact form.