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Know Your Breakeven Point

What is your daily cost of doing business?

How many units – products or hours of service – do you need to sell to cover your expenses? If you’re not sure, you’re running your business blindly. Your business could be turning over a lot of money, but still be making a loss or having a negative cash flow. Knowing the break-even point is helpful in deciding prices, setting sales budgets and preparing a business plan.

Your break-even point is the point at which total revenue equals total costs or expenses. At this point there is no profit or loss – in other words, you 'break even'.

To be profitable in a small business, it's important to know what your break-even point is, as this is the key to determining your pricing and profitability. If you're not profitable, your business will not succeed in the long term. It's as simple as that.

Calculating your break-even point is something you need to incorporate as part of your pricing policy to ensure that you're making money on every unit you sell and that you'll be able to be profitable based on your costs and your sales.

No matter whether you own a service or product-based business, you need to have a clear understanding of your direct and indirect costs and how they affect your pricing and profitability models.

And while we’re talking about expenses, keeping on top of your drawings may be another way to manage your cash flow. Many businesses get into trouble by taking money out of the business as drawings before they have put money aside for GST and PAYGW.

Click here to learn more about how a cash flow statement can help you uncover improvements and efficiencies that can be incorporated into your business.

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