Smart in 60 seconds! Today’s break even point
Our “The Agency Blogger” series continues. Here, we regularly explain key terms of agency controlling in a brief, concise and hands-on manner. Today’s break even point.
The break-even point is when costs and earnings are equal so neither a profit or loss results. If the break-even point is passed, the company operates at a profit - if it is fallen short of, the company operates at a loss. The following calculation of the break-even point is relevant for agencies, for example: How many hours do I have to sell to cover the costs of my agency, that is, to break even?
You will need the following variables for your calculation (we are using fictional amounts here to illustrate the example as effectively as possible):
- The variable costs, in this case the internal hourly rate, is represented by the fictional rate of £50.
- The sale price, in this case the external hourly rate, is represented by the fictional rate of £130.
- The fictional fixed costs per month (e.g. rent, wages, etc.) are denominated at £ 15,000.
- We’re looking for the minimum number of hours that have to be sold (the variable X).
Our sample calculation is therefore as follows:
X = Fixed costs / (sales price - variable costs)
X = £ 15,000 / (£130 - £50)
X = 187.5h
The agency must therefore sell 187.5 hours to break even. The agency earn a profit for each additional hour it sells. The agency software helps you keep track of all the variables so you can quickly calculate your break-even point.