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.
Balance Sheet Payment
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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