Welcome to today’s episode of I Hate Numbers where we talk about Break Even. Making profits is what your business should aim to do. The financial milestone before that is for you to break even. Knowing your break even gives you better business insights, greater accountability and helps you make more profit in your business.

What is Break Even

Your business breaks even when your sales covers all your costs, neither a profit nor a loss is made. However, you can look at break-even for your whole business, or for your individual products and services. Listen in to learn more.

Calculating your business break even

Figuring out and looking at your costs is the first step. You need to understand costs in terms of how they react and behave according to your business activity. In this podcast we revisit Fixed and Variable costs. We talk lemonade selling to illustrate break even, listen to find out more.

Conclusion

However, that is not all, break-even analysis can also show you how much profit or loss you can make at different sales levels. Break-even is your powerful business management tool.

What Next

Grab a coffee, make yourself comfortable, sit back and listen.  Start thinking about the costs that stay static and those that change in your business. Think about your own business break-even.

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In This Episode

• Why knowing your break-even is such a big deal ?
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• How to calculate your break even
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• Developing your own Numbers confidence and decisions
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• Take more control of your numbers to help make money

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to this week's installment of I Hate Numbers. The show that wants you to become friendly with your numbers to help you survive, thrive, and prosper. Numbers aren't just there when times are great. Numbers are there when times are bad. They won't lie to you. They'll tell you the truth.

They're the best friend in business you can have. Last week's show, we talked about costs. We talked about those costs that we call fixed. Do you remember those ones, guys? Those are the ones that stay the same, whatever your business activity is. We went crazy. We started to talk about variable costs. Those are the ones that fluctuate, go up and down according to how much business activity is going on.

And if you are that restaurateur selling plates for food, then food costs go up the more food that you sell. When food salses go down and it gets depressive, you haven't got any customers, then those costs of food go down. Things like your rent, say static, they don't really change a great deal. What we're going to do, we're going to tap into that knowledge that we looked at last week and I'm going to introduce you to this week, is about this idea of figuring out when you haven't actually made a profit, you haven't actually lost any money.

It's that magic situation called breakeven. Now, you might be sitting there thinking, well, Mahmood, you keep telling us that it's all about making money. It's all about making profit, and that's absolutely correct. That's got to be your long-term aspiration. Fix that into your sites, your crosshairs, and you've got to be making profit.

However, before we get to that stage, lots of things are going to be going on. If you're introducing something new, something innovative, if this is a bit rocky, it's still a pretty good thing to know what is that situation where we've broken even. Now, breaking even. Let's think about what that means. It's the situation where you don't make a profit.

You haven't lost money either, and all the money that you are generating, all the sales that you're making, covers all the costs. Break-even, for me, is an absolutely powerful tool to have. It's a bit of a comfort blanket. So, I could say to myself, in my own business here, once I generate a level of sales, that's the magic position,

I've broken even. Everything after that point is good, healthy profit. I can set myself as a target. I've got a bit of accountability in my business then, and I know what I need to do to get to that situation where I've broken even in my business. You can look at break-even for the entire business, break-even for individual products, individual services.

So, if we use that example of the restauranteur, the food business, I could typically work out a break-even point for maybe a delivery service that I want to introduce. I look at the break-even position for what it is on a week by week basis for my business. I can even, believe it or not, drill down and figure out what's the break-even point for a certain type of food that I'm offering.

So, if I've got a new menu item coming up, I can work out how many servings do I need to make in order to break even. It's not just food, everybody. It could be a service business. You can be asking the same question. If you're running a consulting business, you're running workshops, you're making things, you can ask that same question and get a great answer in figuring out what's the break-even point at individual products of the entire shooting match.

Now, that's great. That's the intro. What we are trying to do and what that tells us. Let's now focus about, how do we figure out what those numbers are? How do we figure out when is that point where we break even in our business? And to do that, we're going to have to dip our toes back into the water for last week's podcast,

and if you remember, last week's podcast is about costs, particularly fixed we call them, we call them variable, and we call them mixed as well. If you haven't memorised last week's podcast, which obviously is quite natural, go revisit there. Remind yourself there. And here's what we need to do. So, let's imagine a lemonade seller.

So, lemonade, most people like lemonade. It could be anything else. And let's assume we're retailing it for $5 a cup. It costs us in terms of the cost of the product, in terms of the cups, it costs us a dollar a cup, so every time we sell lemonade to a customer, we're making $4 a time. That $4 we can either call it gross profit, or if you want to be more exact, we can call it a contribution.

Whatever term fits well, they're largely one of the same. So, every time we sell a cup of lemonade, very expensive prestige lemonade this is, by the way, we're making $4 a time. Let's assume that the weekly cost we've got for hiring the store, bits of marketing, money we need to take out for ourselves is about a hundred dollars a time.

So, every week we have to find a hundred dollars for our committed, our fixed costs. Each serving of lemonade generates $4. Well, that means if I do a little bit of number jiggery is that I've got to sell 25 cups at $4 a time in terms of contribution to break even. Fantastic. That's 25 cups. Now, if I wanted to, and I like that in money terms, in dollar terms, in pound terms, then I could say each cup is sold for $5 a time.

So, that's $125 worth of sales before I make a profit. That's my breakeven point. So, now incredibly, I've got two ways to talk about break-even. In terms of number of items, which is 25 or in dollar terms or in currency terms, 125. Now, it doesn't stop there. Think what else can I do with that information? Now, if I know, typically, based on what I've been selling previously, based on what my business plan is saying, based on what experience is telling me,

I know typically I sell on average 50 cups a week, then I know that half that figure represents the break-even. Now, if I want to get more and more people to buy lemonade, just think about the power of what I can do with this information. In order to sell more cups, I might decide to cut the price of the lemonade down from $5 a cup, and let's be really crazy and let's drop it down to effectively $3 a time.

And what that's going to do, if I sell it for $3 a cup, that means I'll make a smaller profit. I might sell more lemonade, by the way, so people might be put off by the price. So what I do, if I cut it down to three, what happens now, if nothing else changes, that's $2 a time in terms of gross profit or contribution. Notice,

by the way, typical jargony things coming in here. Effectively for me, they're largely the same. So, every time I sell a cup of lemonade, it contributes $2 going towards my fixed costs. Now, what this means now, let's assume the rent doesn't change. Let's assume I still need to take out the same amount of money.

Let's assume the advertising doesn't change. That's a hundred dollars still I need to spend on fixed costs, which means now that's 50 cups of lemonade that I've got to sell. Now, that might be possible, that might be very manageable, but it gives you an idea of perspective and link between cutting prices and what the impact is on break-even, as well as the profitability itself.

Guys, I hope you enjoyed this podcast. I'd love it if you could share it. Share the news, share the love, share the number loving as far and wide as possible. Subscribe to the podcast. It's on our site. It's on iTunes, Spotify, and all good podcast stores. If you've got any comments, any follow up, check us out.

There's a facility here. If you've got questions you want us to answer, by all means, fire them away. Have a great week. Look forward to your time next week, and my tip-view this week, have a look at what you do and see if you can figure out what your break-even point will be. For now, number love. This is Mahmood signing off.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.