Step 5: Know The Numbers In Your Business - Pt 5

Break-even

The ‘break-even point’ of any business is the dollar value of sales the business must achieve to cover its fixed costs or overheads and so achieve a profit of $0. Knowing the breakeven point is helpful in deciding prices, setting sales budgets and preparing a business plan.

The break-even point has important strategic implications as well. The more certain a business is of reaching the breakeven point (due to, say, regular customers, guaranteed or contracted income), the lower the level of business risk. In other words, it is the minimum level of sales the business needs to avoid losing money.

To explore this further...

Calculating the break-even point

Break-even (unit sales)* =

Total fixed costs $

Selling price (per unit) – Variable cost (per unit)

* The number of units of goods you need to sell to break even

Break-even ($ sales revenue)** =

Break-even (unit sales) X Selling price (per unit)

** The total value of sales needed to break even


Example of Break-even point

XY Company has:

Selling price (per unit) $10
Variable cost (per unit) $4
Total fixed costs $1,500
Break-even (unit sales) =
$1,500 / $10 - $4 = 250 units

That is to say, 250 units you need to sell to break-even. 250 units before you start to make a profit.

How much do you need to achieve every week, every month to break even… before you are making your profit? How much profit on top of that, do you need to be bothered going to all that trouble of running your business?

Understand what these numbers are so you can set and meet your targets knowingly and with full intention.

Keep track of these break-even numbers and you can know when you are starting to go off track and take steps to get back on track right away.

Problems come when you find out only months later that you’d lost your way.