Breaking even.....

[emerald]

this may sound like a stupid question but how do you know when you break even? say i added up all my start up costs do i include advertising and ongoing costs for consumables to this amount? So the total is x amount or do i only add up my startup costs for kits, tables, towels etc? the when i have made back the cost of these i have broken even? im confused.

 

[skymark]

Sometimes people have different views in their mind as to what 'break even' is, especially in an industry like this.

Generally your daily or weekly break even point would be the point at which you are not making money, but not losing money, so effectively the point (either in pounds or in hours) that you would have to accomplish before you make any profit.

It is harder in this industry as if you are selling umbrellas its easier to say they are £5.00 each and and my costs (both fixed and variable) are this much per week, therefore I need to sell exactly x amount of umbrellas to break even.

As we have different prices in this business for different treatments, it's easier to just know how much all your running costs are for the week, and then you will know how much you need to make at least.

I did a quick search as an example and this doesn't seem like a bad example explianing things.

Fixed, variable costs and break-even | Business Studies Theory | Business & Marketing Resources

Personally I think there should be many more things available to business owners to learn this stuff as unless you have studied business / economics or have worked in a financial environment, how are you supposed to know?

As far as your set up costs go, the point where you have profited as much money as you put into the set up, would be the point at which you start to make a return on your investement. This does take some time and therefore keep an eye on it, but all in all it's best to focus on breaking even on a weekly basis as this will give you a better idea of how healthy your business is financially.

I hope any of this made sense. I tried to keep the economics 'jargon' to a minimum.

 

['chelle]

Do you keep an accounts record? Personally I have a spreadsheet. This spreadsheet records my takings and expenditure on a daily basis, and in the end column it give a total for that day, whether it be a plus or minus (obviously some days you spend more than you take!)

It calculates a weekly total at the end of each week, then at the end of each month it calculates a monthly total and a running total over that tax year. That way, I can see instantly if I have broken even over weeks, months or overall. Sometimes you can break even or even make a slight profit on a weekly basis, but for the tax year still be at a loss (if that makes sense).

My interpretation of breaking even is when I have taken the same amount of money that I have spent overall, including all expediture: start up costs and ongoing running costs. Anything after that is a profit. That is the way the Inland Revenue will look at it on a tax return and so if its good enough for them its good enough for me!!!

Hope that helps and makes some sort of sense!!

 

[emerald]

Thanks chelle, what programme on your computer do you do that on?

 

['chelle]

I use Microsoft Excel. Its really easy to set up. You need to set up some calculation formulas for it to automatically add up your totals, but its really user friendly. There's a help function on there to show you how to do it.

 

[emerald]

i dont have excel:cry: so maybe ill have to try another way

 

[skymark]

I agree with chelle to a certain extent although for accounts, set up costs are neither a fixed nor a variable cost, therefore do not appear on a break even chart.

For example if a man invests one million pounds into a business of his own money, and it costs £500 per week to run the business. If he takes £1000 per week then he has made £500 profit. Of course he will not recoup his initial investment back in one year as most business investments are seen to be long term, but the inland revenue will want their tax on the £500 profit a week he is making.

If I were you I would work out how much it will cost your business to survive per week (as to be honest survival should be the number one objective in the first few years).

 

[emerald]

ok, well does that include paying me cos i dont pay myself yet, i am mobile so dnt have rent etc just petrol

 

[essentia]

Hi A break even chart is only a part of looking at accounts. There are many reasons why there are reservations in using them - costs cannot be easily divided into fixed and variable catergories
Variable costs do not always vary in direct relation to sales revenue (you may change supplier/brand/special offers in bulk)
Fixed costs are likely to go up in steps (rent/rates reviews)
Time periods
Complementary products - one product may sell well due to another. A decision to stop one may affect the other.

Your set up costs - capital is classed as a net asset by the way.
It is better to do a trading, profit and loss account with a balance sheet. A balance sheet is a 'snapshot' of the business at a particular point in time (usually done at the year end) to give an idea of the health of your business. Break even is good to see whether alterations are needed such as raising prices or to calculate the feasibility of an idea etc. The inland revenue will want to see the profit after deductions and this is why you need proper trading, profit and loss accounts. HTH

 

['chelle]

Its very easy to over-complicate your accounts, and the more complicated you make it, the more confused you will be, and ultimately you will have no idea where your accounts are at.

costs are (in the most) tangilbe figures. Even those that are not so exact (such as laundry costs) can be calculated using guidance provided from the Inland Revenue.

We are not accountants and we should leave the complexity of that type of profession to the accountants, otherwise you end up tying yourself in knots and when your tax return is in a mess because you dont have a clue where you are, you will have the Inland Revenue to answer to and will wish you had kept it as simple and straight forward as possible.

Dont try and be an accountant, if you feel you need to keep such intricate accounts, get an accountant. Otherwise, just keep simple, factual and accurate records, and provide records to this effect with your tax return. That way, if there are any discrepancies, you can provide your records to the Inland Revenue who can easily interpret these. You dont need a spreadsheet or even a computer to keep these records, you could buy an accounting book from a stationers. Record the money you take, and the money you spend. You can include your start up costs (eg all those things you have had to buy in order to open you business eg furniture, stock etc). You will be able to use these records to get a running total, and a simpler record like this helps you to see where your business is at a quick glance. If you are unsure about any aspect of record keeping, or what is tax deductable, the inland revenue are extremely helpful with small businesses and also they run some very helpful workshops, some of which are free.

If you really think you need to be keeping intricate and complicated accounts, get an accountant. After all, we are always complaining on this site when untrained people think they can just become techs or therapists, so who are we to assume that we can do the job of an accountant??

 

[essentia]

Hi I think too that it is easy to over complicate matters. The inland revenue are making their self assessment forms easier to follow from April 2008. If you earn under £15,000 you need to know your turnover, profit and expenses. Things become a little more complicated in you earn over this amount. Just keep a record of all your spend for the business and all that it generates with documentation. I think you get offered a course for the Inland Revenue if you feel you need it.

If however you are interested in keeping more detailed accounts and analysing your business - which I do not think is a bad idea try going on a short course or buying a simple accounting book to get you going. Keeping tabs of what treatments do the best and what products sell well are good for starters.