When preparing a budget, it is vital to show the level of sales required to cover the expenses. If the break-even sales figure is close to the sales forecast, then there is little scope for error. If you are a new business, investors will look quite closely at the margin of safety when determining whether to provide support.
If you are a service business, you will need to know how much to charge per hour (though you may offer your customers a fixed price). Your hourly rate equals your annual costs divided by your annual productive hours. Remember that not all of your working hours will be productive - some time will be required for promoting your business, buying supplies, doing the books, etc. You will also need to allow for holidays and illness. For any individual sale you will also need to add direct costs. If you are in manufacturing, then instead of estimating working hours start by estimating the number of products that you will sell. Include all costs - including the cost of your time and depreciation of capital equipment.
Once you know your costs and estimated selling price, you are in a position to calculate how many products or hours of your time you need to sell to break even or cover all of your costs. Any further sales will then provide you with a profit. The easiest way to do this is with a graph. The vertical axis measures money; the horizontal axis measures volume of sales. First plot your overhead costs. This will be a horizontal line - because overheads do not vary with sales. Then add direct costs, to show the total cost for a given volume of output.
Now plot your sales. The point where the sales income equals the total costs is the break-even point. The difference between your forecast sales and your total costs is profit (or loss). The difference in volume between the break-even point and the actual sales is known as the margin of safety.