Understanding the Break-Even Point: What does this mean in your service based business?

When you own a business you hear the word revenue being thrown around a lot. While revenue is important, there are other financial concepts you should be aware of in your business. One of those important concepts is your break-even point.

What is the break-even point in your business finances?

The break-even point is the point in which your total costs and total revenue are equal, resulting in a zero profit. Or said in a simpler way, this is when you have covered your expenses and are not losing money in your business.

To determine your break-even point we can do a break-even analysis. The information needed to complete a break-even analysis includes:

• Fixed costs: We will need to know your fixed costs for providing the service to your clients/customers. These costs include rent, salaries of permanent staff, vehicle/equipment payments and insurance premiums.

• Variable Costs: These costs change in direct proportion to the level of sales and/or services provided. Variable costs for service based businesses can include raw materials, materials needed for the service, commissions on sales and reimbursable case costs in the legal industry.

• Total Revenue: Revenue is the income generated from the services provided to customers/clients.

The break-even point is important when making strategic financial decisions for your service based business. This analysis can shed light on your company’s ability to generate profits. You can use a break-even analysis to determine what kind of cash flow you will need and if you can afford to add expenses as your business grows.

There may be some months where expenses exceed revenue and some months where revenue exceeds expenses. But if you are consistently losing money month over month that is a problem you need to be aware of. Knowing your break even point can help you understand what your revenue needs to be monthly to be profitable.

How do you determine your break-even point for a service based business?

The formula to determine the break-even in sales dollars is:

Break-Even Sales Revenue= Fixed Costs/Contribution Margin Ratio

Contribution Margin Ratio= Sales-Variable Costs/Sales.

Let’s Do an Example!

Monthly Sales = $97,844.2

Fixed Costs = $64,261.67

Variable Costs =$43,180.15

First we need to determine our contribution margin ratio.

Contribution Margin Ratio = $97,844.20-$43,180.15/$97,844.20

Contribution Margin Ratio = .56

Break Even Point= $64,261.67/.56

Break Even Point = $114,752.98

So in this example we need to have a revenue of $114,752.98 per month to break even. We can look at the monthly sales given and see right away that this company is not meeting their break-even point and are currently losing money monthly.

The break-even point is more than just a financial benchmark; it is a powerful tool that helps business owners make informed decisions, shape effective strategies, and understand the dynamics of their business. If your goal is growth in your business it is really important to know the break-even point to have a firm foundation of profitability. The break-even point is a good guide to help you have a thriving and sustainable business.

Do you have a service based business? Do you know your break-even point? Does this math intimidate you? Let’s work together to determine your break-even point and make sure your business is thriving and profitable. Send an email to Leah@lnmfinancial.com or click this link to schedule a free 30 minute consultation.