Do you want your business to break even?

            If you seek advice before starting a new business or adding a new product or market, you will be advised to create a break-even chart.

This will involve calculating your fixed costs, such as rent and administrative employees. It will also mean forecasting your variable costs such as telephones, marketing and everything that will change in relation to your sales revenue. Direct labour and materials to produce your product is also a variable cost. Most importantly, it means setting your prices and gross margin.

Creating the break-even chart as, or before, you start means you are forecasting all the numbers. The chart is a ‘what if’ chart. During your first month reality will bite you on the ass. As you test the market you will find that your prices are too high or too low and you must change them quickly. Likewise, the amount you pay for your supplies. This immediately destroys the validity of the break-even chart. This will continue for several months, with changing prices for your product and for your purchases.

The break-even chart is a bit like a particle in quantum physics – you can measure it, but you cannot see it at the same time. Collecting the information on changes every day is onerous, especially when you are concentrating on sales. It might mean redrafting the breakeven chart every day or two. You might agree that’s out of the question. You are also likely to omit items because there is no verification system.

The answer is to have a monthly set of management accounts which will give you a comprehensive picture of the financial state of the company’s finances in an intelligible and accurate form. You don’t need a break-even chart when you have monthly accounts which contain far more accurate information than the break-even chart. Just react to what the management accounts are telling you.

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