Break Even Analaysis

In planning and managing your business it is important to know what level of sales must be achieved in order to meet total costs.

Every € of sales above this will contribute to profits.

A useful method of determining the level of sales required to cover total costs is a break-even analysis.

Break-even for a service based business is calculated as follows:

Step 1. Determine the number of productive hours available:

For Example:

Total number of weeks in a year = 52
Allowance for annual & sick leave = - 6
Total = 46

Less time allocated to admin & Marketing - 4
Total number of weeks available = 42

Work days per week = 5
Work hours per day = 7
Number of people in the business = 2

Total Productive Hours available
42x5x7x2 = 2940 hours

Step 2. Determine fixed costs

Fixed costs, sometimes described as overhead expenses are costs that remain relatively constant regardless of variations in the level of work done.

They include:

  • Rent and Rates
  • Administration Expenses
  • Salaries and Wages (excluding o/time)

Step 3. Calculate the numbers of productive hours work required to cover fixed costs:

Method 1: If a standard charge out rate applies in the industry Divide the total fixed expenses by the standard charge out rate.

Example:

Fixed Costs for the year are €60,000

Standard charge out rate for the industry is €60 per hour

In this example you must charge out 1000 productive hours to cover total fixed costs (€60,000/€60 = 1000 hours @ €60 per hour)

Method 2: If no standard charge out rate applies in the industry which is the most likely scenario.

1. Divide total fixed expenses by the total number of productive hours. This will give a break even charge out rate per hour.
2. Assets calculated rate in the market. If the rate is too high the business is not viable as any rate below this will cover expenses.
3. Divide total expenses by your determined rate.

Example:

1. Break even charge out rate (divide total expenses by total productive hours) €60000/2940 hours = €20.40 per hour

2. Assess calculated rate in the market. Assume that after your assessment indications are that customers are willing to pay €30 per hour.

3. Calculate the number of productive hours work required to cover fixed costs. i.e: Break even hours = €60000/€30 = 2000 hours

In this example you must charge out 2000 productive hours to cover fixed costs.

Break even for a product based business is calculated differently and is more complex for further information speak to your accountant.

 

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