All business owners need to be aware of their break-even point — that is, the number of units they need to sell to cover their operating costs.
Below, I’ll show you how to calculate your break-even point so you can make wise business decisions that support growth.
Why your break-even point matters?
Entrepreneurs who attempt to run a business without knowing whether or when they’ll be profitable probably won’t be in business long.
Knowing your break-even point comes in handy whenever you’re making plans to invest in your company’s growth or making a decision that will have an impact on profits (i.e. a cost-benefit analysis).
Another key advantage is knowing exactly how much you have to earn to start generating profits. This improves the accuracy of your budgets and forecasts.
What are your fixed costs?
The first step to calculating your break-even point is to list the predictable, ongoing monthly expenses required to run your business.
Examples of fixed costs include:
-Rented or leased office space
-Rented or leased retail space
-Utilities (e.g. heat, electricity, phone service, internet)
Do the best you can to include the most accurate numbers – and be sure to add 10% to cover unforeseen miscellaneous expenses.
List your variable costs
You’ll also want to take into account the business expenses that vary from month to month. To be as precise as possible, calculate an average monthly cost by looking at your variable expenses over a three to six-month period.
Examples of items you’ll want to include monthly estimates for are:
-Cost of Sales
Based on your fixed and variable monthly costs, you can now determine how much you need to sell to reach your break-even point.
Try this simple break-even Point formula
To find the break-even point for any product or service you offer, enter the following numbers in the formula below:
1. Your company’s fixed overhead costs
2. The price of each item or service for sale
3. Each unit’s variable costs
Fixed costs ÷ (unit sales price – variable costs)
As an example, let’s calculate the break-even point for a web designer offering fixed rate website packages priced at $5,000/each.
Fixed operating expenses: $10,000
Variable expenses/package: $1,000
Current sales price: $5,000/package
$10,000 divided by ($5,000 – $1,000)
$10,000 divided by $4,000
According to this calculation, the web designer would need to sell 2.5 website packages to break even and start earning a profit.
To improve profitability, the web designer may decide to cut expenses, switch to lower-priced business service providers, raise their rates, or upsell to existing customers.
To ensure you’re always making business decisions based on the most accurate, up to date information, make it a habit to update your break-even analysis each quarter.
Now that you know your company’s break-even point, what will you do to increase your business’s profitability today?