There is a point for every business at which the amount of money coming in equals the amount of money going out. That point is called Breakeven. If you know what your breakeven point is you have important information to help control costs.
Different kinds of expenses have varying impacts on profit. Understanding how your various expenses affect your bottom line will help you manage your money. Using the Breakeven Worksheet you will see graphically how the various expenses affect breakeven (and, by extension, profit).
Expenses are divided into three categories:
Direct or Variable – These are expenses which move up and down down with sales. If you are manufacturing steel folding chairs, the amount of money spent on steel will vary directly with sales since you will only buy more steel when you need it. The same applies to other expenses of manufacturing.
Semi Direct or Semi Variable – these items vary somewhat with sales and have components of both Direct and Fixed costs. This category typically includes the cost of selling your goods or services, may include some marketing.
Fixed or Indirect – These are the items you must pay whether or not you are selling anything. All your costs of occupancy, salaried employees and insurance will fall into this category.
We have included one worksheet showing the numbers for a manufacturer of folding chairs and a second for you to use. The Breakeven for the chair manufacturer shows actual numbers from the previous year as 100% (the actual P & L for this client is shown and discussed in Using Your P & L). In the case of the manufacturer, the company would need to increase sales to almost 130% of current sales to become profitable support their expense.
Enter your actual in the same (shaded) column. The worksheet will do the rest, calculating increasing and decreasing percentages of your revenue and expense. Fixed expense does not change. This exercise is designed to show you how your expenses affect profit. It will not account for new or anticipated expenses, of course, but will show you what marks you need to hit to break even with your current fixed expenses.