In the last blog, we looked at the operating costs of the business. We understood that these are the fixed costs of running the business that needs to be covered every month by the sales. In your budget, you’ll have put the sales revenue needed to make a profit, as your monthly or annual target. However, do you know how many products or days of service you need to sell to make that target? That number, the number of units sold to pay the operating costs, is called the Breakeven Point. How many sales are required for your income to equal your costs?
For this calculation, you’ll need one of the numbers previously discussed in this series – the gross profit per item. Since the cost price of your product is paid out of the sales income, only the profit on that item is available to contribute to covering the operating costs. To calculate the breakeven point you will need to divide your operating costs by the average gross profit. This will give you the number of products necessary to be sold in order to cover your costs.
What if you are a service business? Do you know how many staff you need to break even? Generally service business employs staff when the workload is too great for the current complement. However, it is important to calculate the optimal number of staff to cover costs and generate a profit.
First you have to calculate the gross profit on sales by deducting the average hourly cost for the employees from the average hourly charge out rate. It may be useful to do this per service type or employee group, if the rates differ vastly. Then you are able to divide the operating costs (net of the employee’s remuneration costs) by the average profit per hour to calculate the total number of chargeable hours to be worked to breakeven.
It can be helpful to then work that back into the number of full-time staff necessary to work those hours. To calculate the available chargeable hours, start with the calendar year, less weekends and public holidays, leave and staff development days, staff meeting time and general unproductive time. Typically it works out to less than 200 days of chargeable time per person. Divide the breakeven hours into days and divide by the number of available days for 1 person to calculate how many staff members you need. You might be surprised at how many staff members you require!
There are a lot of numbers in these calculations, and since we find numbers to be fun, give us a call if you need help with the numbers!