The Break Even Point and its importance for your small business accounting Sydney
During the initial stage of planning to open a business, a breakeven analysis is one of the most important tools you can utilise to make sure you at least cover the costs of your running expenses and are not operating at a loss. The breakeven analysis allows you to find out how much you need to turn over monthly or annually to cover the costs of doing business. This is an example provided by us, the small business accountant in Sydney.
Take the hypothetical example of a kids bicycle shop. Assume that the owner incurs fixed costs of $25,000 to produce and sell a bicycle. The fixed costs usually cover one off items such as the software needed to design bicycles, fees paid to a tester to examine the look and feel of the bicycles and any promotional costs of the business. These costs are fixed because they do not change with the number of bicycles sold.
The other component to determine the breakeven point is the variable cost component. Continuing with our hypothetical example, these can be broken down into $3 for the handles, $6 per seat, $7 for the frame and $4 for both tyres. Also included in the variable costs will be the labour to assemble each bike, which lets say comes to 1.5 hours for a worker earning $20 per hour. Therefore, the total unit costs for a bike equal $50 ($30 in labour and $20 in materials). If a bike is sold for $100, the margin per bike is $50.
Given the $50 margin for each bike sold, the fixed costs are covered if the following number of bikes are sold:
Breakeven = $25,000 = 500 bikes at $50 / unit
This tells us that a minimum of 500 bikes are required to reach the breakeven point.
Some of the advantages of the breakeven analysis are that it results in a make or buy decision if deciding whether to manufacture your own variable components or to buy these from a third party. It also assists in planning the production of those items which return the highest margin. It can also be used to detect incremental costs which may go unnoticed otherwise.
There are limitations to be wary of as well however. A breakeven analysis relies on costs not changing too much in the long term. It does not take into consideration changes in the selling price and provides a snapshot of the breakeven quantity at a point in time. The cost of financing any equipment is also disregarded.
We hope that the breakeven analysis helps you in determining the number of customers serviced / units sold and is a good starting point to increase your profitability. Should you feel like you need help with you small business accounting in Sydney, contact mas accountants now to get immediate help with your business accounting in Sydney, Surry Hills and Zetland.