This is the point at which income and expenses are exactly equal. The business has recovered all expenses, but not made a profit or loss.
Break even analysis is critical for any business owner, as it shows exactly when you begin to make a profit. It is also a great planning tool that can be used when setting prices and the effect pricing will have on volume and profit.
The break even point is the lowest limit when determining profit margins. You will know how low a price you can offer and the effects of discounting on your net profit.
You can calculate the break even for any period of time – a year, quarter, month, week, day – just make sure all three estimates relate to the same time period.
The formula used to calculate the quantity you need to sell to break even is:
Or to calculate the break even in dollars:
Businesses should also calculate their cashflow breakeven point.
The sustainable growth rate (SGR) simply tells you how fast you can grow, given the current financial performance of the business and its available financial resources.
The SGR encourages business owners not only to focus on growth strategy but also the growth capacity of the business.
While growth is a key focus of most start-ups, pursuing a growth strategy that would take the business beyond its SGR means additional funds are required.
Without putting those funding requirements in place at the right time, you risk growing beyond your means (also known as overtrading) and if not addressed early enough eventually being declared insolvent.
To avoid this, the sustainable growth rate can be used to plan healthy business growth in line with a suitable financial strategy, or to limit growth to an appropriate rate if additional funds are not available to the business.
How well is your business performing compared to other investments? Your business is an investment. You need to view and analyse it, just like you would with shares or other investments.
Calculate what the return on the investment you have made into the business really is and how hard the assets are working for you.
When determining your investment in the business, you should take into account the “sweat equity” you have reinvested back into business through foregone wages.
I have seen some businesses, where the return on investment is barely more than what you would get from a term deposit or by investing in blue chip stocks.
Given the high risk typically involved in owning and operating a start-up business you need to ask yourself – will it be worth it?
Marc Peskett is a partner of MPR Group a Melbourne based firm that provides business advisory services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises. You can follow Marc on Twitter @mpeskett
