Updated: Nov 20, 2020
Understanding what your minimum financial targets are to cover your overhead costs will enable you to reduce financial stress and give you the headspace to focus on other areas of the business, such as growing your sales pipeline. Having a visible target in place will give you something to track against each month and anything you make over and above the target is profit for the business.
What are your overheads for the month? Therefore, how many sales or jobs do you need to achieve in order to breakeven?
How to Calculate Your Minimum Targets
Calculate what your overhead costs are for the month (eg wages, rent, electricity etc), this is the amount of gross profit that you need to achieve in order to breakeven
Use your average margin on sales to calculate what the sales requirement would be to achieve that level of gross profit
Then break this down to what your average sale or job is to have an estimate minimum number of sales or jobs you need to complete for the month (see example below)
Once you understand what your monthly breakeven number is you can set your monthly sales target i.e. what do you want to aim for each month over and above your minimum financial target
Review how you are going against your targets once you have completed your month end process
If operating expenses are the same each month then using the above Xero Profit & Loss Report we can work out the number of breakeven sales required
Total operating expenses for the month are $4,480
Therefore, the required Gross Profit (sales less cost of goods sold (direct costs)) to breakeven is $4,480
Using the above Profit & Loss report the margin (markup applied to direct costs) is 35% ($4,992 / $14,262)
Therefore, the amount of sales required to breakeven would be ($4,480 / 35%) = $12,800
If each widget had a sale price of $20 then 640 widgets would need to be sold in the month to breakeven. You can then break that down to be 160 widgets need to be sold each week
This calculation provides break-even profitability, if you have drawings and debt servicing commitments that are higher than your depreciation expense you should add these to Operating Expenses prior to completing the above calculation.
If you need our support, please contact us here.
Author: Lisa How, Business Advisor at Velocite