Break Even Point

Keep An Eye On Your Break Even Point

Thursday, September 27th, 2012

For many of us, the last few years of business have probably been tough. Sales have slowed, consumer confidence is still low and profits seem to be eroding. Perhaps it’s time to take a good look at your break even point.

A break even point can be defined as when your expenses and revenue are equal. Meaning you’re not making a loss, but you’re also not making a profit. Most businesses will look at their break even point (BEP) and work out a strategy to achieve over and above that point in order to return a profit.

When business is tough (as it is right now for many people) it’s tempting to turn off ‘optional expenses’ to lower your BEP. These often cause the least pain because you’re not firing staff or making them redundant.

However, one activity that almost always suffers is advertising and this will cause your business pain. Turning off advertising can lead to a resulting drop in sales in future months which just delays your pain point.

Break Even PointA better solution is to look at your fixed expenses to see if you can reduce any of those ongoing costs. Here are a few ideas you might consider;

  • Lower your office rent, perhaps through renegotiating your terms with your property manager or changing premises when your lease expires. In a difficult economic climate, there’s often good premises available for rent at great rates. In fact, some will even give you 3-6 months free rent if you sign a 2-5 year lease.
  • Review your mobile phone plan for your staff. It’s not uncommon for this to save hundreds of dollars each month.
  • Restructure your monthly social activities within the business. So instead of holding 1 event each month for $1000 each, hold 1 event every 2 months for $1500.
  • Speak to your bank and ask if your current loans are on the best plans. Banks often change their loan packages and you might find you can reduce your repayments significantly.
  • Some service providers like to charge a monthly fee – but often these can be replaced with ‘as needed’ services. IT support is one such service where you can often reduce costs. In a lot of cases, an internal staff member can be appointed as the ‘IT support’ for basic tasks which can be done during normal working hours. It might affect his/her productivity a bit but can help you reduce consulting rates significantly.
  • Consider your software solutions. There’s now a wealth of cloud based software that is paid monthly on a subscription based on # of users. In many cases you could save 50% or more on your software costs by switching to cloud based solutions. One piece of software both Ryan and I use is Project Bubble. It’s great for our project management and the costs are very low when comparing to traditional software.

Whatever the case, your break even point is good to know. Take the time to figure it out and you’ll sleep better at night.