If you are in business, at some point you have wondered where did all that money go??
When do I start to put money into my pocket, FOR ME?
At what point in the week have you covered all your costs and starting to make a profit?
How much of your product must you sell to just cover costs?
It is essential to know this in business and it is called your break-even point:
- Shows you if you are charging enough for the product you provide.
- Good indicator of business performance – if you’re not selling enough each week, you’re not covering your costs.
- Breaks it down into manageable weekly targets.
Lets look at an example:
Joe the mechanic would like to know how many hours does he have to work each week before he has covered his costs?
To know this he needs to know what his fixed costs are each week – these are costs, such as rent, insurance, office expenses and interest that do not change regardless of if you work or not (unfortunately those suckers will always be there).
He needs to identify what his fixed costs are and work out how much it costs him each week.
Once he knows how much his costs are each week, regardless of whether he works or not. He can work out how many hours he must work by dividing his weekly fixed costs by the profit he makes on each item he sells. In Joes case his labour.
Joe knows his weekly fixed costs are (has to pay these regardless of whether he works or not):
Shed rent – $300
Office lady wages – $250
Interest on his equipment loan $50
Insurance $50
Total fixed costs per week – $650
Joe charges $100 per hour – he needs to work six and a half hours ($650 divided by $100 per hour) every week before he starts to cover his fixed costs and make a profit.
So Joes magical number is six and a half hours before he puts money into his pocket.
It is imperative that you know yours!
