Do you know when will your business make a profit?

Managing business performance is always a balancing act. That is an act in which certain cost formulas must be balanced in order to achieve optimum output and maximise the profitability of the business.




A review of your company’s financial statements is not always the best way to acquire an accurate picture of how a business is performing. There are a number of useful analysis techniques that can be used to arrive at a more comprehensive understanding and picture of a company’s financial health. Finding a companies break-even point is one method that can be used to assess your company’s financial health.



To properly asses a company’s financial health, analysis techniques such as reviewing fixed costs, variable costs, the break-even point and the contribution margin can be used. These analytical tools are able to present a far more in depth picture of the financial health of your business. For example a break-even analysis is based on fixed costs, variable costs per unit of sales and revenue per unit of sales.



Fixed and Variable Costs



Fixed costs are those costs that are always present, regardless of how much or how little is sold. Some examples of fixed costs include rent, insurance and salaries. Variable costs are the costs that increase or decrease in proportion to sales. Some examples of variable costs are raw materials, delivery expenses and sales commissions.



The contribution margin is calculated as the total revenue from a product or service less the total variable cost. The key point in understanding contribution margin is to understand that as revenues increase from selling more products or services, variable expenses will increase at a proportionate rate. The contribution margin will also increase at a proportionate rate.



Using the contribution margin as an analysis tool will help gauge the impact of cost and sales volume changes on operating income. Understanding the contribution margin as well as fixed costs, variable costs and the break-even point, are important points as they lend much insight into income, costs and profits.



Being able to track fixed costs and variable costs is a necessary component of running a business. These are extremely important costs to track as they affect a company’s bottom line. There is not a singular ratio or analysis technique that will offer all the financial information relating to the running of a business.



In essence a successful business requires more than just basic bookkeeping formulas. Running a business often involves a far more complex financial knowledge than what the average lay person possesses. Ultimately the choice is yours as to how your business is run and the level of management information that you think is necessary. The recent ‘credit crunch’ has proven that getting the financial side of business right is more difficult than some people think. The continued growth of a business depends on the profits that are made.