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The breakeven calculation is great financial management information for any business. It tells what you want to know, but of course it doesn’t tell you how to fix it. That is your job. But at least you know there is a problem and where to look.
So where do you look? Think about the variables (things you can change) that are involved in this calculation, and what you can do about it:
- Sales – you can increase sales by increasing price and / or volume
- Cost of sales – you can find some efficiencies in costs and / or processes to decrease cost of sales
- Gross profit margin – will improve if you increase sales and / or decrease cost of sales (above)
- Fixed costs – are often fixed for various periods of time, but not permanently. These costs always come up for review
I can’t stress enough how important the concepts of pricing and costing are in determining your breakeven point and profit.
Of course, the real power of breakeven is in financial forecasting. It is the number one financial tool of the business planner.
If you are competent with Excel, you can build a financial model of your business on a spreadsheet. That way, you can know before you hit the street, whether or not (on paper at least) your business will make a profit. The implementation is up to you, but if you hit your targets you can be sure you will be successful.