What Do Limited Companies Need to Know About Their Break-Even Point?

What Is meant by the Break-Even Point?

The break-even point is when a business’s total revenue equals its total costs – this means that your company is neither making a profit nor a loss.

It’s the minimum performance level your business must achieve to avoid losing money.

You must remember to consider all costs when working out your break-even point, and to distinguish the two key types – the break-even calculation depends on it.

Fixed Costs
These types of costs will remain consistent regardless of output and include things like:

• Insurance
• Salaries
• Office rent

Variable Costs
These costs will fluctuate with production or sales and include things like:

• Shipping costs
• Equipment
• Marketing costs

You need to ensure that you’re carefully tracking all of these costs, no matter how small; this way, you can gain a bigger picture of how to progress beyond that break-even baseline.

Why Does a Break-Even Point Matter to Limited Companies?

Knowing your break-even point will help you run a financially sustainable company.

This baseline figure gives you an insight into how your business is doing, directly informing pricing, planning and decision-making:

• Cost control – this can highlight areas where expenses may be too high, so you can adjust them if possible.
• Cash flow planning – gives you an insight into how long you can operate before profitability, which can help with planning for slower months.
• Pricing strategy – can ensure that your prices cover costs and create a margin.
• Funding decisions – helps to demonstrate viability to potential lenders or investors.

It’s vital to reach break-even to keep your business running, but you don’t want to simply survive; a sustainable limited company will need to generate consistent profits beyond this figure to grow.

How an Accountant Can Help

A good accountant can use their expert knowledge to provide the right advice and guidance for businesses.

When it comes to a company’s break-even point, an accountant can help in a number of ways:

• Create accurate calculations – an accountant will be able to correctly separate fixed and variable costs, as well as look at adjustments needed for seasonality or irregular expenses.
• Look at potential scenarios and make forecasts – by looking at possible scenarios such as rising costs, this can support forward-looking decision-making.
• Set realistic targets and identify risks.
• Provide ongoing monitoring of your accounts.

We hope you found this page helpful. If you have any further questions, our team of experts are available to answer any queries, so give us a call on 01442 795 100 or email jaime.thorpe@dolanaccountancy.com. Alternatively, contact us via live chat.