One of the most important figures required by any business is the breakeven sales figure. Breakeven sales calculates what sales/turnover figure the company needs to cover all of its overheads. For a start-up business having this figure early on is crucial as it effectively sets the minimum sales target for the new business. The breakeven sales formula is short and relatively simple if you have the three figures that you need.
What complicates the calculation is that the cost of sales must be removed from the equation. The cost of sales is the amount spent on input costs for the final products sold, what was once called the cost of materials. So here are the three figures you need to calculate the breakeven sales:
1. The percentage of turnover/projected turnover/product sales that is made up by the materials/wholesale purchase/raw materials used in making a product, buying a product for resale or the core costs of delivering a programme/project. In other words, if the projected turnover is €100,000 and the cost of materials/goods for resale etc is €40,000, then the percentage of turnover made up by the cost of sales is 40%
2. The remainder of the turnover is available to pay overheads and when you exceed the breakeven sales figure is available as profit. This is the percentage of turnover not made up by cost of sales. In the above example it is 60%. This is one of the 3 figures you need in order to calculate breakeven sales.
3. The total overheads in currency value. Overheads are the expenses you incur which are not made up of actual cost of sales. Thus total expenses less cost of sales = overheads. These include salaries/wages, insurance, electricity, rent and rates, phone costs etc.
4. The last figure is 100.

Thus to calculate the breakeven sales figure you put your figures in to the following formula:

Total overheads in currency value                       X 100
________________________________

% of turnover not made up by cost of sales

 

Thus if overheads are €90,000, then the breakeven sales figure for the above example would be:

 

90,000      X 100    =       150,000
______

60

 

Thus your sales target to breakeven in the year would be €150,000 to cover €90,000 in overheads.

It is absolutely critical for start-up and early-stage businesses to have a clear understanding of their breakeven sales. A word of warning. Many start-up entrepreneurs say that I will not put in a proper salary for myself and I will take what is left over. This is very dangerous. Your salary costs are included in the overheads figure. If you do not put in a proper salary for yourself and you work out the breakeven sales on this basis, you will aim to achieve a breakeven sales figure that makes you nothing. Thus always put in a projection as to the salary that you need/want realistically when calculating the breakeven sales or everybody else will be happy but not you.

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How to write a cash flow

August 14, 2009

A cash flow is nothing more than a running monthly projection of income and expenditure. However, the format of the final annual cash flow seems quite intimidating to someone who has never seen one before. The trick to understanding the cash flow is to build one up from scratch. The following is a made-up example.

The first table shows the income and expenditure statement for a start-up confectionary business in month one. Sales are all cash with no credit sales and account to €13,500. Expenses account for €18,542.70. Materials are stock for resale and account for €15,500 of this and other overheads make up €3,042.70.

cashflow1

Table 2 shows table 1 plus the addition of a running total to the end of the income/expenditure statement. As the company started up with a balance of €0.00 and made a loss of €5,042.70, the position at the end of month 1 is a loss of €5,042.70. Now, if this is quite simple then building up the rest of the cash flow will be equally as simple.

Let us now work out a cash flow for the first quarter (first 3 months). As can be seen month 1 is exactly the same as before. Month 2 shows an income of €13,950 and expenses of €14,443.23, thus generating an operating loss in Month 2 of €493.23. At the end of Month 2 the business has accumulated a cash flow loss of €5,535.93. In Month 3 income of €13,950 is generated and expenses incurred are €12,461.16, resulting in an operating profit of €1,488.84. Thus, at the end of Month 3 having had two months of losses and one month of profit, the running cash flow position from the start of the quarter to the end of the quarter is a negative €4,047.09.

cashflow2

Sales are holding steady as are overheads in the main, but as the shop stocks it shelves over time, less stock is required to be added every month and the cost of materials (goods for resale) is falling to a sustainable level month on month. Now if we extend this exercise for 12 months we get the final cash flow.

cashflow4

As can be seen the figures for the first quarter are exactly the same. As the year progresses sales increase and overheads and cost of materials balance out. By the end of the year the company is in profit and has a healthy cash flow position, ultimately making a profit of €17,481.42. If you were to look at the last table first, then this exercise might seem daunting. However, if you build up from month one, the final 12-month cash flow seems far more doable.