Break-even Sales Analysis:

Every business owner should know how much revenue is needed to allow the company to pay all
business costs and leave the owner a fair profit return. Profit is determined by the company's
cost structure and sales volume over the course of one year.
Cost Structure: Background
“Fixed” Costs - Business expenses that are independent of the level of sales are classified
as “fixed” costs (FC). It’s important to understand the term “fixed” does not mean the cost
can not be changed. For instance, lease payments (building, equipment, fixtures, etc.) are
examples of business costs that must be paid whether the company has a big sales month or
a slow one. The lease holder may hope your business does well but when it comes time to pay the rent, your sales success
is of no concern. Other types of “fixed” costs generally include insurance premiums, membership fees, repairs &
maintenance, loan payments, professional fees, etc. Salaried employees usually are considered fixed costs.

“Variable” Costs - Business expenses that change as the level of sales change are known as “variable” costs (VC). If a
company sells and installs carpet and tile, the purchased flooring materials are “variable” costs. As the company’s sales
volume grows, the amount of materials purchased also increases. Materials purchased tend to be the largest cost category
in many businesses representing 30% to 80% (or more) of every sales dollar. Other examples of “variable” costs include
freight costs, sales commissions, supplies (shop, store and office), credit card fees, etc. Hourly employees often are
counted as variable costs.

“Semi-Variable” Costs - Many business costs possess both “fixed” and “variable” characteristics. So how do you know
which is which? One rule of thumb is to imagine ... if the business were closed for 4 or 5 weeks, would a particular cost go
away or decrease significantly? You would still have the rent to pay but you wouldn’t continue the full hourly payroll. A
business closed for 4 weeks would still have telephone costs in the monthly service charge whil long distance charges
would fall to zero. Gas and electric costs may drop substantially during this 4 week period but wouldn’t go completely
away. Some advertisements are fixed costs (yellow page ads) while others are variable depending on the volume of sales.
It's okay to estimate how much of a semi-variable cost is “fixed” and how much is "variable". Always use the best
information available. For example, advertising in your business maybe 30% fixed and 70% variable.

For the Next 12 Months …

1. Estimate Sales - from all business sources - what is your goal? $

2. Net income - this is your reward - what is your goal as a % of sales?

Income Net Income $0

This is why
you're in
business.
3. Business Costs - Estimate all business costs (cash) for the next 12 months and classify them as
"fixed" or "variable". If a cost contains both fixed and variable charcteristics, allocate the
total cost appropriately.
Total Costs Fixed Costs Variable Costs
Materials Purchased $
Freight charges
Supplies - Shop / Store
Payroll
Payroll Taxes
Insurance
Rent: Equipment
Building Rent / Mortgage
Utilities
Telephone / Fax
Advertising & Promotion
Vehicle Expense
Computer / Internet
Travel & Entertainment
Repairs & Maintenance
Office Supplies
Postage
Freight-out
Professional Fees
Dues & Subscriptions
Donations
Bad Debt Expense
Bank Charges - credit cards
Taxes (other than sales)
License & Fees
Loan Payments
Other

Total Expenses $0 $0 $0

Break-even Sales Analysis

Step 1: Income You want to do
Variable Costs as a % of Sales more than just
#DIV/0! "break-even".

Step 2:
Calculate "Break-even Factor"
#DIV/0!
Profit & Sales Analysis
Step 3: Step 1:
Estimate Break-even Sales Volume Add Profit Goal ($) to Fixed Costs
#DIV/0! $0

PROOF: Step 2:
B-E Sales Volume #DIV/0! Calculate Sales Volume
less Fixed Costs $0 #DIV/0!
#DIV/0!
less /Variable Costs #DIV/0! PROOF:
#DIV/0! Profit Sales Volume #DIV/0!
less Fixed Costs $0
#DIV/0!
less /Variable Costs #DIV/0!
= Profit Goal #DIV/0!