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Break-Even Sales Analysis:: For The Next 12 Months
Break-Even Sales Analysis:: For The Next 12 Months
Every business owner should know how much revenue is needed to allow the company to pay all
business costs and leave the owner a fair profit return. Profit is determined by the company's
cost structure and sales volume over the course of one year.
Cost Structure: Background
“Fixed” Costs - Business expenses that are independent of the level of sales are classified
as “fixed” costs (FC). It’s important to understand the term “fixed” does not mean the cost
can not be changed. For instance, lease payments (building, equipment, fixtures, etc.) are
examples of business costs that must be paid whether the company has a big sales month or
a slow one. The lease holder may hope your business does well but when it comes time to pay the rent, your sales success
is of no concern. Other types of “fixed” costs generally include insurance premiums, membership fees, repairs &
maintenance, loan payments, professional fees, etc. Salaried employees usually are considered fixed costs.
“Variable” Costs - Business expenses that change as the level of sales change are known as “variable” costs (VC). If a
company sells and installs carpet and tile, the purchased flooring materials are “variable” costs. As the company’s sales
volume grows, the amount of materials purchased also increases. Materials purchased tend to be the largest cost category
in many businesses representing 30% to 80% (or more) of every sales dollar. Other examples of “variable” costs include
freight costs, sales commissions, supplies (shop, store and office), credit card fees, etc. Hourly employees often are
counted as variable costs.
“Semi-Variable” Costs - Many business costs possess both “fixed” and “variable” characteristics. So how do you know
which is which? One rule of thumb is to imagine ... if the business were closed for 4 or 5 weeks, would a particular cost go
away or decrease significantly? You would still have the rent to pay but you wouldn’t continue the full hourly payroll. A
business closed for 4 weeks would still have telephone costs in the monthly service charge whil long distance charges
would fall to zero. Gas and electric costs may drop substantially during this 4 week period but wouldn’t go completely
away. Some advertisements are fixed costs (yellow page ads) while others are variable depending on the volume of sales.
It's okay to estimate how much of a semi-variable cost is “fixed” and how much is "variable". Always use the best
information available. For example, advertising in your business maybe 30% fixed and 70% variable.
Total Expenses $0 $0 $0
Step 2:
Calculate "Break-even Factor"
#DIV/0!
Profit & Sales Analysis
Step 3: Step 1:
Estimate Break-even Sales Volume Add Profit Goal ($) to Fixed Costs
#DIV/0! $0
PROOF: Step 2:
B-E Sales Volume #DIV/0! Calculate Sales Volume
less Fixed Costs $0 #DIV/0!
#DIV/0!
less /Variable Costs #DIV/0! PROOF:
#DIV/0! Profit Sales Volume #DIV/0!
less Fixed Costs $0
#DIV/0!
less /Variable Costs #DIV/0!
= Profit Goal #DIV/0!