| Non-Profit Finance Toolkit: How to Calculate Break-Even

Posted in Non-Profit at 9:00 AM by Loftis Consulting

There are so many decisions that need to be made for a non-profit on a daily basis. Most of these decisions deal with the achievement of the mission of the non-profit; however, most decisions have some type of financial impact on the organization.

For financial impacting decisions, there needs to be some type of underlying analysis to understand the magnitude of the impact. Break-even analysis is one of the tools that can aid a non-profit executive or manager to assess their financial situation at the program level or organization level.

 

What Is Break-Even?

Break-even is the point where your costs equal your expenses.  In other words, the organization is not making money but is not losing money either.  Even though most not-for-profits do plan to break-even, the organization should plan for a surplus to help in times of economic crisis or unforeseen events.

 

Why Is Break-Even Important?

Break-even is critical to understanding what it takes for a non-profit to survive.  The higher the break-even point, the more risky the organization will be.  For example, if two non-profits are virtually the same in revenue but have different cost structures one non-profit will be more viable than the other.

 

How to Calculate Break-Even in Units and Sales Dollars?

An understanding of your business drivers and basic financials is needed to calculate break-even.  The steps are as follows:

1. Separate costs into two categories – – fixed costs and variable costs. Fixed costs are expenses that do not vary with the change in sales volume. Variable costs change in direct relation to the changes in sales volume.  An example of a fixed cost is office rent which does not change with sales volume; however, online storage usage charges increase in this example for every new customer acquired would be a variable cost.

2. Plug your information into the formula below to determine break-even in units.  Keep in mind that units for break-even do not have to be a physical product, it can be a customer conversion, a billable hour and so on.

Breakeven = Fixed Costs/Price per unit – Variable Cost per unit

3. Plug your information into the formula beloe to determine break-even in sales dollars:  Assumes there is not a lot of variability in revenue to costs.

 

Breakeven   = Fixed Costs/ 1-(Variable cost as a percent of revenues)

 

The break-even formula can easily be changed into a profit formula by adding your desired profit to fixed costs and calculating from there on a unit or sales dollar basis.  In addition, the same break-even formula can also be changed into a cash flow requirement formula by adding loan payments and such to fixed costs as well.

By knowing your break-even, you can confidentially understand what it takes to build a fiscally sound non-profit and make knowledgeable adjustments accordingly.  As your costs change, make sure to update the break-even point to ensure long-term success.

 

Loftis Consulting is a provider of CFO services for non-profit and for-profit businesses on an interim, project or part-time basis.  Outsourcing CFO services is one way to lower fixed costs and thus lower the break-even point.  To learn more visit our Non-Profit CFO Services page.

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