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Biggest Mistakes in Business – No.1 False Break Even Point

In my 30 years in the world of owner-managed businesses I see one huge mistake time and time again. This is:

Not Knowing Your True Break-Point

Don’t know if you know it? Here are a few pointers. Your true break-even point:

  • Must cover all your outgoings including your Income Tax, GST, ACC & drawings
  • If you buy & sell goods or incur costs which vary with sales e.g. contract labour, your true break-even point must be measured in terms of your $ gross profit, not your sales.
  • Must be re-assessed regularly
  • Should also allow for items which don’t feature in your Profit and Loss account e.g. the principal element of loan repayments.

For more details on how to calculate your break-even point see this article.

This is a typical example of using an out-of-date or incorrect break-even point. Last year I was referred by a local business bank manager to a client (with a low gross profit margin) who was getting into difficulty and whose business borrowings kept increasing. When I met the client he said if his sales were $60,000 pm he was OK and could cover all his outgoings. This was in February, so I enquired if the sales for the year to 31 March were going to reach $720,000. He said “oh yes, about $850,000”. So of course, that didn’t stack up, as he was complaining about his overdraft which kept increasing. The problem? Because of price competition he was discounting which meant his margins were slipping which meant the historical gross profit margin his accountant had used to calculate his break-even point was way out of date!

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2 Responses to Biggest Mistakes in Business – No.1 False Break Even Point

  1. Quite right David. Thanks for pointing it out. Every business calls for different practices and even more so every business owner. There is no recipe that fits everyone so better work with people who have a long experience of dealing with many types of businesses in order to find the solutions that best fit.

  2. david trim says:

    Very true Nick. Like all measurements you have to make them in a form that is real to the person. some people only look at weekly figures and can make sense of things on a weekly basis… they should do their break even on a weekly basis. Most retailers function on a daily thought pattern, so they should use daily break even, and so it goes…