All business owners need to know their break-even point – the number of units they need to sell to cover their operating costs. Once you reach it, your business is no longer in the red and you’re officially earning a profit. Here’s how to calculate yours so you can make decisions that support greater growth.
Why your break-even point matters
Owners who run a business without knowing whether or when they’ll be profitable probably won’t be in business long. Knowing your break-even point is invaluable whenever you’re planning to invest in growth or making a decision that affects profits. It also improves the accuracy of your budgets and forecasts.
What are your fixed costs?
First, list the predictable, ongoing monthly expenses required to run your business – rented or leased premises, employee salaries, office expenses, insurance and utilities such as electricity, phone and internet. Use the most accurate numbers you can, and add about 10% to cover unforeseen miscellaneous expenses.
List your variable costs
Next, account for the expenses that vary month to month. For precision, calculate an average by tracking them over two to three months. These typically include inventory, labour, commissions, shipping and delivery costs, and interest on business cards or lines of credit.
A simple break-even formula
To find the break-even point, use: fixed costs divided by (unit sales price minus variable costs). For example, a web designer offering $5,000 website packages with $10,000 in fixed operating expenses and $1,000 variable cost per package calculates $10,000 / ($5,000 – $1,000) = $10,000 / $4,000 = 2.5. So they need to sell 2.5 packages to break even. To improve profitability from there, they might cut expenses, switch to lower-priced suppliers, raise their rates, or sell add-on services.
Final thoughts
To keep your decisions based on accurate, up-to-date information, make it a habit to update your break-even analysis each quarter. Now that you know your break-even point, what will you do to lift your profitability?