During turbulent times, companies do more with less. For your business to develop winning ways during these challenging times, benchmarking is a very effective way of staying ahead of your competitors.
Benchmarking takes financial figures from your accounting system and converts them into ratios, which allows you to compare your results to those of your competitors. These figures are usually expressed as a percentage of sales or profits, before abnormal items are taken into account.
Benchmarking is working ‘on’ your business rather than ‘in’ your business.
So this week’s tip, what is break-even analysis and how to calculate the break even point for:
- Average total revenue per unit, whether that is for an hour of service or a single product ,
- Average per unit cost, and
- Average month’s fixed running costs.
There are three steps to calculate the break-even… using an ice cream as our product for this example.
· First, the average total revenue per unit. This is the price you charge the customer for each sale, whether it is for an hour of consulting advice, or for a product such as an ice cream or, a loaf of bread, before you deduct any of your costs to produce it, such as electricity, or wages or, IT costs. For our example, it is $3.00 per ice cream.
· Second, is the average per unit cost, or what it costs to make each unit or provide say an hour of service, once the business is set up and ready to produce and sell it. This per unit cost may include the materials and direct labour costs to deliver the service or product, for example for our ice cream it is $2.00.
· Thirdly, average month’s fixed running costs. This is the cost for an average month for say wages, electricity, rent, bank charges, insurance, telephone and internet. These are basic running costs you have to pay in an average month to be able to start producing and selling the very first item of anything, therefore for our example, $6,000.00 per month.
So to calculate your break-even point, ie. the number of units to sell or, provide an hour of service, the formula is:
Average month’s fixed costs
Unit selling price – cost to produce
Break-Even $6,000
$3 - $2 = 6,000 units.
Therefore, this business is going to need to sell 6,000 units per month, in order to break-even and to effectively stay in business.
Over the next 4 weeks, we will continue to look at benchmarking your business and start examining the various departments within your small or medium-sized business. Factors such as stock control, finance, planning and management and how they impact on your cash flow.
Remember, know your break-even point, every day and every month and you will be in control of your business.
Reference: Bright Ideas for Small Businesses – how to get your Cash Flowing efficiently, Charisse Gray, 2009.
Reference: Bright Ideas for Small Businesses – how to get your Cash Flowing efficiently, Charisse Gray, 2009.
