Question

Topic: Other

Calculating The Break Even Point

Posted by Anonymous on 6/3/2011 at 12:08 AM ET 125 Points
I am working on trying to calculate the break even point for my B2B business. The company offers a wide variety of services, all with different prices. What makes it more difficult is that the amount charged to clients is based on their needs and the intensity of the project, and some services have an hourly consultation rate while others have a flat rate (that will change based on their needs). How can I calculate the break-even point? Is it even possible? Thank you.
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  • Posted on 6/3/2011 at 1:27 AM Accepted
    hi...yes it is possible..there are two factors a)the product offerings (price per unit) and b) pricing type (price per hr vs flat rate)
    follow these steps
    1.) segregate ur service mix into percentage i.e x % this service will be sold, or X% of customers will take this service
    2.)now segregate ur revenue for each service mix,ie. this service will contribute this much to totall revenue.
    3.) then for each service , have a break up of hourly rate vs flat rate.for flat rate % , approximate no. of hours and then divide by the revenue of flat rate businesses
    idea is to get avg. rate /hr even for flat rate projects.
    4. now you have total hours and revenue for those hours . I am hoping u have the costs otherwise u can compute the costs also in similar manner
    then apply break even formula
    since urs is a service i recommend taking hours instead of units to calculate the BE point
    since at BE point profits is 0 just equate sales to costs. u wil get no. of hours of services to be sold.

    to get where will BE point occur just divide the BEP hours by no. of hours of services u can provide each month.

    hope this helps.. in case u want to do a more detailed anlasis lemme kno!!






  • Posted by mvaede on 6/3/2011 at 10:06 AM Accepted
    Perfectly possible, yet not 100% accurate due to the changing nature of your offer.

    I assume you know you sunken cost: everything you have to pay no matter how much or how little business you're doing. i.e. phone plans, rent, internet, loans.....

    I assume you know the cost (roughly) of each of your services. This is very important
    You should include all variable cost to this calculation, which are everything you pay to get the job done (including your own or somebody's else time) which could also be gasoline but not the insurance (sunken cost)
    You could make these calculations without including your own salary, if you get paid with withdraws once money is available.

    Now you know the total monthly sunken costs (-something)
    You know what each service will contribute to your profits
    Make an assumption on how many hourly rate services you're selling and how many flat rate services you provide. The better your guessing here the more accurate your calculations.

    By plotting this in to a graph, you'll see you BE point where your flat sunken cost line is being met with your variable earnings, based on your assumptions.
    You could make different assumptions from 100% flat rate to 100% hourly (intense to less intense) or any combination of these.

    Hope this helps, otherwise I'm available to help you further.

    Mikael
    B2B Marketing
  • Posted by Peter (henna gaijin) on 6/3/2011 at 11:13 AM Member
    What may be interesting is to determine a break even point for each service you offer (as if that was the only service you offered). Take each service, determine the variable costs involved, the fixed costs, the income from that service, and plot out how much of that you would have to sell to break even. The benefit of doing this is it will tell you how each service does at getting you towards break even (do you have the right pricing, etc.).

    Most businesses, when they do this, find some interesting results. Some parts of their businesses are often run at a loss, where other parts make the majority of their profits. Often this tells you on areas to focus or areas you need to change your business.

    Having the break even by business line also lets you estimate break even overall. You can apply what percentage of your overall business each individual service is and figure out how much you need to grow to get to break even.
  • Posted on 6/5/2011 at 7:32 PM Author
    Thank you everyone for your answers. Where do marketing costs fit in? My marketing costs vary month by month in accordance with different campaigns/programs.
  • Posted on 6/6/2011 at 7:09 AM Member
    for that sort of thing i suspect ABC will help u..that is activity based costing. In case u can trace ur marketing spend per service then add that up in ur service specific costs..in case u cant then divide the mktng cost in % of revenue each service gives..Its anyways a part of ur cost and not just COGS
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