Business Alchemy 101 Lesson 18–Break Even Sales Factor (Application)

Spending money you do not have is very common in our society. Many people every day overextend themselves and then end up chained to a debt that grows and grows with no real hope of breaking free.

The cash flow of a business can be quite similar to this scenario. Quite often, a business owner will be passionate about improving and growing the business and spend money on advertising, equipment or man-power that will indeed grow the business but cannot be afforded by the business.

Though not quite as effective as the Contribution Margin analysis, the Break Even Sales Factor can be used to quickly ascertain a company’s cash position to help make decisions about how, when and how much to spend. Consider it wise to establish a base for spending.

For example, set a Break Even Sales Factor of 110% minimum before any cash can be spent to improve the business. That way, you have a sales goal to push for to budget for those important improvements. In doing this, you will be able to stay out of debt and continue to build your business with fewer stresses.

Your business THRIVES on a solid FOUNDATION!

Business Alchemy 101 Lesson 18–Break Even Sales Factor (Part Two)

The equation for this ratio is quite simple and here it is:

(Gross Profit/Total Expenses) X 100 = Break Even (as a percentage)

So to understand the results, we refer back to the article on Understanding Ratios. We want the Gross Profit to win, but we are viewing the ratio from the Expenses point-of-view.

This means that if we have a number higher than one hundred, then each dollar of expenses has to wipe out more than one dollar of gross profit, which means we are doing well. If the number is below one hundred, then each dollar of expense is wiping out more than one dollar of gross profit and we will not be seeing any net profit at the end of the day.

In more technical terms, if the result is higher than 100%, then we are higher than our break-even and adding profit to the company. The total expenses also gives us an idea on how much we need to sell in order to break even.

In the next installment I will go over briefly some applications of this ratio.

Your business THRIVES on a solid FOUNDATION!!!

Business Alchemy 101 Lesson 18–Break Even Sales Factor (Part One)

The Break Even Sales Factor is a very simplified way to find out how much you need to sell in order to turn a profit. The most accurate way to determine this is to use the method discussed under the Contribution Margin topic, but that way takes a lot more work.

To illustrate how this works, pretend I am back in elementary and I bring lunch to school. I have 10 friends that I eat lunch with and we have all agreed to share our treats with each other every day.

One day I have a bag of Goldfish crackers and there are 20 crackers in my bag. I hand out one little cracker to each friend and then there are ten left for me.

However, the next day I have fruit snacks and there are only 8 fruit snacks in my packet, so only 8 of my friends get fruit snacks and I do not get any.

This is how the Break Even Sales Factor works. My friends are all the expenses of my company. The treat is the gross profit of the company (Revenue minus Cost of Goods Sold), and the number of treats left over is the profit I get to eat.

I will go over the equation in the next post.

Your business THRIVES on a solid FOUNDATION!

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