The Break Even Point Explained - Part 1

Dated : 21-Mar-2022

Hi I'm, Andy cocktail dress, from cult culture and welcome to another of our short, instructional videos for co-ops community businesses and their development workers. This series of videos, we're looking at key financial performance indicators and their role in helping us support co-ops and extract financial information. This particular video we're going to look at the break-even point what it is how we calculate it and why it's important.

So what is the break-even point? Well, the break-even point very. Simply is the volume of sales, where you neither make a profit, nor a loss, that's really helpful, because it tells us at what point what our turnover would need to be to make sure that we didn't make a loss.

So it gives us somewhere to aim for it's really useful in creating our marketing objectives. So right at the start of, um of a co-op's development journey, or at the point where the co-op is reassessing, how it's doing, and it's trying to create the next set of marketing objectives one of the. Things that you would do as a development worker, or as a co-op is is is decided is his workout.

What do you think he will sell how much of what to whom by when um, and you have come up with a set of smart marketing objectives, and we have some other videos on marketing objectives, uh? So please check them out in the channel, um. And when you're doing that, it's used to know whether these are the best marketing books. This is actually what you should be aiming for. And one of the ways that. You can do that is by looking to what this trip is by trying to work out what the break-even point for your business will be.

So if you can predict what your overheads are likely to be and your overheads are your fixed costs, the ones that don't change, no matter how much you sell. So looking at things like wages, insurance, rent marketing, etc., etc., um, if you know what they're going to be, and you know what your gross profit margin is going to be because you have a pricing policy based on. The markup or you, you have a good idea of how much it's going to cost you to make each sale. Then you can check whether your marketing objectives are high enough.

The other use that it has, um is when if you're trying to examine what's wrong with the business, if a business is making a loss, one of the first things that people say is, oh, we need to cut our overheads because we're making a loss. Now, generally your overheads are the things that you need to make your business work. And what. Businesses, often mean, when they say to cut that overhead is that they mean, cut stuff lay people off reduce hours, reduce wages, um. And actually in lots of ways cutting your overheads is the last thing that you should be doing in a business and there are a number of other checks. You should make along the way, and we'll do a whole video on the checks that you should look at to see to analyze where the problem is within a business.

But one of the things that you can do, um is almost at the end kind of the. Last check is if your gross profit margin is okay. You know as it's in line with your historic, uh standards, it's also in line with what should be expected in your sector. But at that, gross profit margin you can't, you look at your breaking you, calculate your break-even point and that's just unrealistic. There is no way you're going to be able to sell enough to do that. That is the point where you think okay. Now I need to cut my overheads.

So it's, quite a long way down the journey that you decide. That but it's a very useful, uh metric for that decision, how do you calculate your breakeven point? Well, it's, very it's, a very simple calculation. You get your overheads, your total overheads, and you divide them by your gross profit margin. So for example, we have uh here, um, some financial figures for a friendly co-op.

And this co-op is predicted to sell or has sold, um, fifty thousand pounds worth of stuff. And to do that, the cost of sales was thirty, five thousand pounds. So from our sales, we. Subtract our cost of sales, and we get our gross profit. 15K. We divide our gross profit. Um, we divide our gross profit by our sales, uh.

And then times that by uh, a hundred to express it as a percentage to get our gross profit margin so that's, our gross profit margin, which is one of the two figures that we need to calculate our break even point. So this co-op has a gross profit margin of 30 percent. It then has, uh in terms of its overheads. It has wages, rent and insurance. So its total overheads are 12.000., and if you divide that to 12 000 by 30, which is dividing 12 000 by 0.3, you get 40 000 and so that's, how you calculate the breakeven point.

So that is our very short, uh, introduction to the break-even point in the next video we're going to look at the role. The break-even point in examining, um, new spends new, um new proposed overheads and how we can use it to see whether it is worth doing the new proposed overhead. Um, I hope you liked this video. If you did, please click the like button.

If. You have any comments about this video or any um videos, you would like to see us make please leave a comment in the comment section below. If you wish to find out more about key financial performance indicators for co-ops and community businesses, or any way of supporting, um being a co-op development, supporting co-ops and community businesses, please subscribe to the channel and hit the notification bell to uh to be notified. When we upload more short, instructional videos for co-ops and community. Businesses, thank you everyone for watching, and I'll see you in the next video.