If you’re a business owner, you need to know your business’ break-even point — the number of units you need to sell (in dollars or units) in order to cover your operating costs. If you reach this point, it means your business is turning a profit and in a more stable operating position. Being aware of where your break-even point is allows you to make smart and informed decisions to support your business growth.
Why does the break-even point matter?
Anyone who starts out running a business without knowing anything about their break-even point, aren’t likely to survive very long. If you’re planning to invest in your company’s growth or making a decision that is likely to impact profit, you need to know where your break-even point is and when you’re going to reach it. Being armed with the knowledge of how much you need to sell to make a profit also allows for more precise budgeting and forecasting, setting sales targets and price levels.
By understanding where your break-even point is, you can work out:
- how profitable your present product line is
- how far sales can decline before you start to incur losses
- how many units you need to sell before you make a profit
- how reducing price or volume of sales will impact on your profits
- how much of an increase in price or volume of sales you will need to make up for an increase in fixed costs.
What do you need to know to determine your break-even point?
Firstly, you need to list your fixed costs – those that are anticipated and ongoing in the everyday operation of your business. These may include:
- Rent or loan expenses
- Employee salaries
- Office expenses
- Utilities (e.g. electricity, phone, internet)
- Miscellaneous buffer
When preparing your information, ensure you include the most accurate figures you can and include some buffer where there is possible variation or for unexpected expenses.
You also need to consider your variable expenses that change each month or are less predictable, including:
- Labour costs
- Shipping costs and delivery fees
- Interest fees (for any credit accounts)
When you have your costs itemised, you can work out how much you need to sell to reach your break-even point.
What formula can I use to calculate my break-even point?
You can use the following simple calculation to determine where profit begins:
- Breakeven dollar value needed before net profit = Overhead expenses/ (1 – (Cost of Goods Sold / Total Sales))
- Breakeven number of units to be sold before net profit = Overhead expenses / (Unit selling price – unit cost to produce)
You can also use this simple online calculator to calculate your break-even point. Remember that this is a simplified approach and you should always speak with your accountant or financial adviser about your business’ profitability. Call us on 1300 ARABON or visit our website.