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Calculating and Understanding The Break-Even Point

Oct 25, 2018 1:51:43 PM

So, you have completed your company’s budget for 2019 – congratulations! The budget gives you a spending plan in support of your revenue goal. And you have also inputted the data into your accounting software package so you can pull an Actual vs. Budget Report every 30 days. This report is a great management tool to keep your business on track to achieve all your financial goals. The most effective businesspeople manage their operations based upon projections and results measured in numbers … not based upon intuition and hope.      

Is there anything else that should be done with the 2019 Budget? The answer is most certainly “yes”. Another effective management tool that is a direct outgrowth of the budgeting process is a Break-even Analysis. To calculate your firm’s Break-even Point, first identify each Budget Account as either a variable or fixed expense. As a kitchen and bath dealer, your biggest Variable Expense will always be the Cost of Sales … the materials, labor (both payroll and subcontract), and freight that go into each project you sell. Examples of other Variable Expenses include Sales Commissions, Sales Payroll Taxes, Advertising, Marketing Tools, and Travel/Entertainment. Examples of Fixed Expenses are Salaries, Rent, Leasing Contracts, etc. 

Having properly coded your Variable and Fixed Expenses, here are the other seven steps involved in determining the Break-even Point, using an operation with a budgeted Income (i.e. defined as the sum of substantially completed projects) as a sample:

#                                  Step                                         Calculation

1          Enter the Income for the period                      $1,000,000

2          Enter the Variable Expense total                    $657,100

3          Calculate the Contribution Margin
            (CM = Income – Variable Expense)               $342,900

4          Calculate the Contribution Ratio
           (CM Ratio = Variable Expense/Income)          .3429

5          Enter the Fixed Expense total                        $267,900

6         Calculate the Break-even Point
           (BE = Fixed Expense/CM Ratio)                     $781,277

7          Calculate Break-even per Month                    $65,106                      

You can proof the Break-even Analysis by doing the following math: Fixed Expenses + Operating Profit/CM Ratio. The result should equal the Income or Revenue for the period.

Read our blog post, "Using the Break-Even Analysis" to see how to put this into use!