Understanding and using break even

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.

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?

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.

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