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Understanding and using break even
Episode 1369th October 2022 • I Hate Numbers: Business Improvement and Performance • I Hate Numbers
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If you want to stay afloat in your business, understand break even and how it can help. Every industry needs this key number for different reasons but regardless of what kind of company or size you are you should have a grasp on these fundamentals!

Understanding and using break even and applying is neglected by many business owners. That's a shame, it's powerful and in helping you make profit, and better business decisions

In this week's podcast I will

Firstly, explain what break-even is

Secondly, why it's so powerful, not only for your bank balance, but also for your mental well


So, what is break-even? In very simple terms, it’s the point at which your total income equals your total costs. Once you hit this magical number, you no longer make a loss on every sale and start making profit! It’s an important marker to know for any business owner.  It tells you when you reach profitability and how much money you need to bring in before you start making a profit.

Break-even analysis can also help with forecasting future sales and budgeting.

If that wasn’t reason enough to love it, break-even is like your personal financial advisor giving you the thumbs up or down on whether a new project or product is worth pursuing. You don’t have to be a maths genius to use it – I have a free online calculator that does all the hard work for you. Why not try out break even today and see how empowering it can be for your business decisions?

Subscribe to my I Hate Numbers podcast where every week we discuss ways small businesses can survive and thrive,

Are you ready to have an easier and more rewarding relationship with your numbers?  My book, I Hate Numbers helps you get there.

This book will show you how to have a rewarding, productive relationship with numbers and your business.  Furthermore, my book will help with that battle between the ears, that all business owners experience.  Learn more and buy my book today!

Get in touch with us to help make your life easier and stress-free. Contact us if you need help figuring out and sorting your numbers, creating your future financial story plans, your taxpayroll and other accounting and business matters

This podcast uses the following third-party services for analysis:

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Understanding and using breakeven in your business is an absolute must for any business owner. Whether you're a solpreneur, whether you're a big oak of a company, whether you are a service provider, a social enterprise, a charity, throw anything into that mix. You need to understand break even. In this week's I Hate Numbers podcast, I'm going to be explaining what breakeven is. I'm going to be talking about why it's so powerful not only for your bank balance, but also for your mental wellbeing,


looking at its assumptions, how we actually do the calculations. And also I'm going to throw in some numbers and go through an illustration showing you how you do the calculations for break even and how you can use it to make judgments. And by the way, folks, if the idea of numbers over the radio fills you with dread, if the idea of using numbers in the calculation makes you slightly wary, fear not. I'll add a link in the show notes where you can access our free online break even calculator. All you need to do is type in some numbers, press the button and hey presto. The results will appear in front of you. And also you can see those in graphical format as well. Let's crack on with a podcast.


You're 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.


Now, in this week's podcast, I'm going to be looking at break even. And it's an application, it's a tool that I've used in over 27 years in business, not only for myself, when I make judgments, when I make decisions, but also for many of my clients. Using breakeven is a really powerful way for them to settle some anxiety and give power to their business. First of all, what is breakeven? The idea of breakeven is a situation of equilibrium. Perfect calm is brought to us in our business. It's neither a situation where we're making profit, sob sob, or we're not losing money. It's that equilibrium where we've covered costs and that's a great ideal first marker.


It's amazing to me how many people in business do not understand or use breakeven and don't even know what they've got to do just to stand still to cover their costs. Once we reach that point in our business life, that means anything beyond that point is excellent news, is profit that we're generating. Now, why is it so powerful? Why is it so good not just for our bank balance, but also for our state of being. My experience has been such that when people know a marker, what they've got to sell to standstill to cover their costs, that's a great first line in the sand. That's a great hurdle to get through first of all.


We know anything beyond that point generates profit, which is great news. By having that idea of that target, that figure for breakeven, it helps us identify what we need to get there. Now, not only for that, it brings a certainty and clarity and insight to our costs. More of that later on when we talk about the calculation. Also we can use it to set targets. So once we've reached that first milestone of breaking even, we can work out how much we need to sell in order to achieve a certain level of profitability. Now, the powerful thing about breakeven is not just used for the overall business, you can use it at a very simple level.


If you're putting on a new project, making a new product, having a one-off event, you can work out how much business you need to do to make that event viable. Imagine you are an entertainment business, you're putting on a showcase event for the evening. You might want to sit down and think how many tickets do you need to sell just to cover your costs? How many tickets do you need to sell to make more money? And if those ticket sales look quite ambitious, what can you do to either reduce the cost of the event to actually bring that and make it more viable? Now remember, numbers by themselves, whether you make a profit or loss isn't the ultimate arbiter, the ultimate reason why you should do something. But it's certainly a big important factor to take into account.


Now, understanding your break even also highlights the level of risk that's there. It may be a risk that you're prepared to take. You need to understand what your profitability is. So that simple calculation that reveals so much, that showcases so much, it can be really, really powerful. And remember, business owners, when we have some degree of certainty of what's going on, when we've got some idea of what we need to do to get to a certain position, it brings clarity, it brings certainty. And when we can plan our stress levels minimise, they go down. And that's got to be a good thing.


How do we go about calculating breakeven? Let's roll back a little bit. And there are three key numbers that we need to understand in our break even. The first one is the type and the nature of the cost that we have. Now, in a break even situation, we need to be able to somehow configure, analyse our costs into two broad categories. The first type of cost that we will have in our business and all businesses will have these, whether they are humble market trader or multinational businesses, you will have costs that are considered fixed in nature.


That doesn't mean they'll always be the same over time, costs will always fluctuate. But these are costs that are constant irrespective of how many items we sell, irrespective of what activity is going on in our business, those costs remain constant. Think about the situation. If you're a car driver, you drive your car. Well, every mile that you drive in your vehicle, things like insurance costs, the car tax will not fluctuate. They stay the same until it comes to renewal date. If you park your car on the drive, if you drive it 1000 miles, it makes no difference to those costs. They will be fixed. If you're running a business, you're manufacturing, you're a public house, the rent that you pay, the salaries that you pay your staff will be constant and they will not change irrespective the level of business you're undertaking.


Now, obviously they will change eventually, but they remain constant over that level of activity. The other type of costs that you might have are what are called variable. Now, the idea behind these costs is that they change. They fluctuate depending on how much business you're doing, how much activity you're undertaking. If we consider our earlier example of the vehicle, the car, well, if you think about the car that's being driven, every mile that we drive, every journey we undertake is the fuel costs that will fluctuate according to how many miles that we travel, according to how many journeys we undertake.


If we think about a restauranteur, a restauranteur that's quiet, nobody's coming in to eat their delightful food, then the food costs will be pretty minimal. As they have more customers coming through the door, those food costs will go up accordingly. Those food costs are considered variable. Now, for your business, it could be items that you're buying in, it could be freelancers that you're using to carry out project work. You've got no projects. Freelancers subcontractor costs are effectively avoided. The third thing we need to understand is what are we going to be selling our products for? What's the price of the service? What's the price of each unit? What's the price of the project?


Once we get those three numbers, we can then dive in and do some number crunching. Now, this is the timeframe. Let me just demonstrate over the airwaves of the podcast an example of Mr Gardner who makes plant pots. What a choice, eh? Now, we've got three key numbers we're going to be looking at. Our gardener has fixed costs of £1000. The price of each plant pot sold is £8. And the variable cost and manufacturing costs are £3 for each item. Now, what we are saying then, if you look at the difference between the selling price and the variable cost, that gives us a five pound figure. And that figure by those folks let's get our jargon buster out, is called contribution.


Every time we sell a product, it generates £5 worth of contribution. Now comes the beauty of the calculation. Now, our business here has got to sell enough plant pots to cover the £1000. So that means 1000 divided by five gives you 200 plant pots. Once he's achieved that level, anything over that point is straightforward profits. Obviously, breaking even is great. Now, our gardening business wishes to make profits on top so he can carry on growing the business, sustaining the business, rewarding himself. So he decides he wants to make £1000 on top and wants to know how many plant pots have got to be sold.


So what's our target now? Well, we've got to reach an overall amount of £2000. Each product that you sold contributes £5 towards that. So that means £2000 divided by four gives you a magic number of 400. So once they sell 400 plant pots, bingo. We've not only broken even, but we've then made a profit equivalent to those extra 200 units sold. Now remember, folks, you can do this for your entire business. You can do this for a product, you can do it for a service, you can do it for a one-off project. It can be multilayered. So it's really powerful tool to use. Now remember, if you don't like the mass part of it, you think, oh, that's a bit beyond me, then check out the link in the show notes to access to our free online break even calculator,


where you can let the software, let the online tool do the heavy lifting for you. Just think about the numbers, type them in and see, hey, presto, there are the results. So let's summarise what we've got, folks. We've got breakeven and absolutely essential. If you're developing a business, you got a new product, anything that goes on is absolutely critical. You understand what you've got to do, what's your target just to get to that first major milestone of breaking even and covering your costs, washing your face, if you want the vernacular. You then can use that to say, okay, what can I do to evaluate my business? The cost that I'm expensing, the profitability that I'm making, where can I make those improvements and where can I improve things going forward?


It helps you price your products, helps you price your services, helps give you certainty, helps you give direction. We've then got the calculations part of it, which is a really important aspect of it as well. So take all those combined, folks. There we have an illustration of why it's really important to understand and how to use breakeven in your business. Folks, I hope you got some value out of this podcast, out of today's topic, if you have, I'd love it if you could subscribe. Even better, I'd love it if you can leave some feedback. I believe Apple podcast is a good one to go on. Check the show notes for the links that will show you where to go. And until next week, folks, stay sanguine.


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 shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.





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