If you have been asking yourself ‘When will my franchise break even?’, you’ll be able to find many of the answers you need in this article.
Investing in a franchise is a big decision, and not one to be taken lightly. Whether you’re browsing opportunites, just about to sign on the dotted line, or have been operating your own franchise unit for some time, you might be wondering ‘When will my franchise break even?’ After all, you want to be sure that investing your hard-earned money is financially viable and going to lead to long term success. Below we will help you work out your break even point by using a simple formula. But before we go any further, let’s just refresh our knowledge of what exactly it means when a business ‘breaks even’.
What does break even mean?
The break-even point is when the total revenue of a business matches the total costs – essentially, it’s not making a profit or a loss. Working out the franchise break-even point is a very important financial analysis strategy for franchise unit owners. When you know, or have a good approximation, of the fixed and variable costs for the product or service your franchise produces, you can use the information to determine the break-even point. It means you can work out how much product you need to sell at a certain price to break even.
What do you need to calculate the break-even point?
To work out when your franchise will break even you need to know the values of three variables. Let’s look at these more closely below.
These are costs that are constant regardless of the amount of goods or services produced or sold. They are expenses that franchises need to pay, that are independent of specific business activities. A great example of this is rent.
On the other hand, variable costs do depend on the sales volume. They increase as production rises and decrease as production reduces. An example of this is the cost of packaging and raw materials.
Selling price of a product
This is how much customers pay for your product/service.
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Why is working out the break-even point important?
There are many benefits to calculating this, including:
- Allowing you to work out how profitable your current product line is
- Determining how far sales can decline before you start to incur losses
- Helping you set fair prices
- Set sales budgets
- Giving you chance to prepare and adapt your business plan
- Determining how reducing the price or volume of sales will impact on profits
How to calculate your break-even point
To even be able to begin to answer: ‘When will be franchise break even?’, you need to use a break-even point formula. This is:
Fixed Costs ÷ (Price – Variable Costs) = Breakeven Point in units
Let’s breakdown what this means ...
The break-even point is the same as the total fixed costs divided by the difference between the unit price and variable costs. With this formula, the fixed costs are the total of all of your overhead costs. The variable costs and price are stated as per unit costs, in other words, the price for each product unit that you sell.
Price – Variable Costs is also known as the contribution margin. This is used to find the optimal price point for a product. It can also show you whether the product is generating sufficient revenue to pay for the fixed costs and determines the profit being generated.
Let’s use an example to demonstrate how this works in the real world.
A technology business has worked out its fixed costs consist of its rent, executive salaries, property taxes, and depreciation of its assets. Combined, the fixed costs add up to £50,000. The variable costs associated with producing the product are factory labour, raw materials and sales commissions. The variable costs have been calculated to be £.0.60 per unit. The product is priced at £2.00 per unit.
With this information, the business can work out the breakeven point for the technology business’s product.
£50,000 ÷ (£2.00 - £0.60) = 35,714 units
This means that this business has to produce and sell 35,714 units of its product in order to cover its total expenses, both fixed and variable.
It’s important to remember that this point will vary from sector to sector, so we can’t make a sweeping statement of when all franchises will reach it.
>> Read more:
When will my franchise break even?
In terms of the number of months or years it will take you to break even and start to become profitable, it is difficult to say for certain, due to a number of factors. But in order to achieve this as quickly as possible, you need to concentrate on building relationships and networking as much as possible.
If you can’t break even
If you have found out that your break-even point is higher than your expected revenues, you will need to relook at your business plan and decide what aspects can be changed. You could find an achievable break-even point by:
- Finding a less expensive supplier
- Using remote working to cut out rent costs
- Selling your product/service at a higher price.
There’s no easy answer
It’s untrue to suggest there is a specific time period when all franchises will break even. However, you can look for franchises that are advertised as having a good return on investment and have a chat with the franchisor and other franchisees to get a rough idea as when this might be.
If you’re ready to start your franchising journey, browse our UK franchise directory to find the perfect opportunity for you. But if you’re trying to learn more about the franchise world, you can also check out our other informative articles.
Becky Martin, Point Franchise ©