I don’t expect business owners and entrepreneurs to turn themselves into accountants and finance experts but I do believe that there are two financial concepts that they must understand to be consistently successful.
The Two Critical Finance Issues Every Business Owner Must Understand
These will make sure that the owner is managing for profit and cash.
What Is The Break Even Point?
The break even point (BEP) is the sales volume or sales value at which the business neither makes a profit or loss.
Provided sales are profitable, if the business is trading below the break even point, it will make a loss.
If it is trading above the break even point, it will make a profit. The bigger the gap between the BEP and the actual sales, the bigger the profit.
Why Is Break Even Point Important In A Business?
The normal assumption is that businesses exist to make a profit and they will try to maximise their profitability.
So why should a business owner or manager be concerned with breaking even?
- The break even point analysis reveals the basic cost-volume-profit relationship in the business.
- Understanding the cost-volume-profit relationship will mean the business owner makes better decisions about buying and selling.
- You should take this thinking into your business plan so that it becomes a plan focused on how to achieve a particular result.
- Succeeding in business is difficult. Getting past the break even point is an achievement in itself.
- Monitoring the break event point and the margin of safety (the difference between your actual sales and the break even level of sales) indicates how viable your business is. Trends show whether your business is getting stronger or weaker.
The Simple Model Can Be Used To Support Financial Decisions
If you know the break even point model, you can adapt the thinking to all kinds of other financial decisions which will help guide you.
What Is The Cost Volume Profit Relationship In A Business?
That question is answered in this article.
How Do You Calculate Break Even Point?
You need to understand the cost volume profit relationship in your business first because you will have some judgements to make.
There are few certainties about accounting and finance unfortunately and similar businesses may reach different decisions which will guide their behaviour. However whilst there are some grey areas, there are some things that are wrong.
The question is answered in this article.
There are practical issues that make the real world harder than the accounting textbook questions. Be aware of the difficulties but don’t let them put you off.
How Do You Lower Your Break Even Point And Make Sure Your Business Trades Above The Break Even Point?
Excellent, you’re now thinking like a business owner who is determined to succeed.
You can read more here.
Is Understanding Break Even Point Analysis Enough To Make Sure The Business Succeeds?
There are two issues.
- Making your business plan happen – that’s what the other seven pillars of the Eight Pillars Of Business Prosperity do.
- The other critical issue to understand in finance is cash flow management. Ultimately businesses go bust because they run out of cash. They may run out of cash because they trade unprofitably (i.e. below the Break Even Point) or because they make bad cash flow decisions.
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Paul Simister is a business coach who helps business owners who are stuck or struggling, to get unstuck. You can then start attracting, converting and keeping more customers. If your business is based in the UK and you feel stuck, get a Business SOS consultation (please click) with me to get you unstuck.Don't forget to download and read my FREE Report - The SIX Steps PROFIT Formula: The Simple Rules That Every Small Business Owner Needs To Know available to download at Six Steps Report (Please click).
- How To Calculate The Break Even Point Of A Business
- What Is The Margin Of Safety In Break Even Analysis And Why Is It Important?
- The Secret to Increasing Your Profits by Vincent Turner
- How Break Even Analysis Can Guide Financial Decisions
- Contribution Margin Is Your Real Income – Don’t Be Fooled By Sales Revenue