This guide will explain how to calculate your breakeven point and what this can tell you about the health of your business.
What is the breakeven point for a business?
That is the breakeven point when you make enough money to pay your bills. Your total costs and revenue are roughly equal. You still need to make money, but your business isn’t running at a deficit.
Let’s use an example to illustrate. You spend $10,000 monthly on rent, employee wages, and products. If your business loses $2,000 a month on an income of $8,000, it is not profitable. If your business makes $12,000 monthly, it is making a profit. If you make $10,000 monthly, your business is officially in the black.
Breakeven Formula: Components
It is simple to understand the breakeven point. It is more challenging to perform a breakeven analysis but less time-consuming. This involves collecting data about your business and crunching numbers with a formula.
You will need the following numbers to calculate your breakeven point:
Fixed Costs
All of these costs are fixed and unchanging. Rent is an example of a fixed expense for a lease term. The website for an eCommerce business is a fixed price because you pay set fees for web hosting.
Variable Costs
Variable costs are those that change from one month to the next. These costs are due to external factors, like colder weather and shorter days, that you cannot control. Variable costs include the price of your inventory or products, which may fluctuate depending on the supplier.
Contribution Margin
The contribution or gross margin is the amount left after subtracting all variable costs.
Revenue per unit (products/services)
The revenue per unit represents a business’s income from selling one department of a product or service.
Calculating the breakeven point
These formulae and data from your point-of-sale reporting will help you calculate the breakeven point for each unit or dollar of sales.
Breakeven point in Units
Divide the fixed costs by this figure to find the net profit. Divide the fixed costs by that figure.
Breakeven point in sales dollars
Add up all the fixed costs. Add all variable expenses. Divide the total fixed costs by the dollar amount of variable costs.
How to perform a breakeven analysis
Breakeven analyses can put your costs into perspective and help you make the right decisions for your business.
After opening a shop, consider using the break-even analysis to gauge your financial performance. This is one of many times you should consider a break-even analysis.
You can do a breakeven analysis in situations such as these:
- Understand the price You need to make a new service or product profitable
- Calculating price versus the potential of a new channel for sales, such as an actual store
- Change your business structure or model
- Addition of new employees in the business model
The process for a break-even analysis is identical in all these scenarios. Use the formulas above to calculate the breakeven point.
