Businesses nowadays tend to fall short of their calculations and some even wallow on the idea of simply meeting the expenses all the time because their sales are barely covering the overall costs. Now, this is why you should know how to calculate the break-even point. But first, let’s learn the meaning of the break-even for a service business.
What is a Break-even Point?
The fixed and variable expenses accumulated over time are also called the overhead costs. A break-even point is a term for revenue that should cover the total amount of overhead costs. Therefore, you should master how to calculate the break-even point. In learning how to do so, take a look at how to calculate the break-even point for a service business using some of the key points regarding the break-even point formula below.
1. Gross Margin
Before knowing the break-even point for a service business, you need to identify your gross margin based on the total sales of your products and the total costs to create your products. Afterwards, you need to calculate the difference of the total sales and the total costs, which will result in your gross profit or loss.
To be able to determine your gross margin, you just need to divide the gross profit by the total number of sales. The result will give you a percentage that you can convert into decimal that will tell you the exact amount that you need to keep, from every dollar you sell, in order to cover your overhead costs.
2. Overhead Costs
By this point, you should know whether your company incurs sales or not, because overhead costs are always there as your business progresses. Therefore, calculating the break-even point is crucial to any business. The break-even point of a service company needs to consider general overhead costs such as payroll, rent, insurance and office supplies.
3. Balance Sheet Payment
In learning how to find a break-even point for your business, you always need to consider the balance sheet amount. This is the daily financial business position of your company based on liabilities, assets, and financial involvements.
Now that you have an idea on the certain terms on how to calculate the break-even point for a service business, the break-even point formula is the next step.
Break-even Point Formula
(Overhead Costs + Balance Sheet Payments) / Gross Margin = Break-even Point
$30,000 + $10,000/ 95% = $42, 105.26
In the example above, it concludes that you need to sell a total of $42, 105 to make sure that you cover the overhead costs and balance sheet payments.
You must take note of the typical break-even pitfalls that any business will encounter. With the various products you sell, you may tend to vary your cost structures, which complicates the break-even point for a service business. Another pitfall occurs when you do not know where to draw the line between the overhead costs and the total number of sales. The worst case scenario is when you have been provided with inaccurate financial data.
Knowing how to calculate the break-even point for a service business is essential to any company’s success. Projecting profit over a period of time will not be an easy task if you do not know the basics on how to calculate the break-even point. It won’t allow your company the opportunity for growth since you will be working on a project-to-project basis without being able to get ahead. This is why it is crucial to master the simple math needed in calculating the break-even point.
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