Working out when you break even
What is the break even point?
The break even point is the income you need to earn just to cover all your fixed and variable costs. Any income you earn over and above the break even point is your profit.
Why you need to know your break even sales figure
Do you know how much money you need to earn just to cover your basic running costs?
Do you know how many sales you need to make to earn that amount?
As well as being a necessary component of any business plan, calculating your break even point will give you a specific sales target you need to reach, and it will help you determine on an ongoing basis how well your business is performing.
If you’re not exceeding the break even point you won't be making a profit so you’ll need to put immediate corrective action in place to either:
- increase the number of sales you make
- increase the average sales revenue of each sale
- increase the frequency with which customers purchase from you
- increase the amount of money each customer spends
- reduce your costs
- a combination of any of the above
If your business depends upon a high number of low value sales you’ll probably want to work on a weekly or even daily sales target so you exceed your break even point. If your business does not work on high volume sales a monthly figure for sales target setting and measurement may be enough.
How to measure business costs
Every business has certain costs it must cover in order to stay solvent. These costs will be things such as telephone line rental, office rent, staff wages, purchase of raw materials or stock, and so on.
Costs are classified as either:
- fixed costs - These do not change with the amount of sales you make or goods you produce and are made up of things such as office rent and loan repayments.
- variable costs - These vary in direct proportion to the amount of sales you make or goods you produce and are made up of things such as raw materials and sales commission.
Whether they're variable or fixed the costs need to be met so it’s essential to look at your sales forecasting to work out how much you need to earn to cover all these costs – this is called your break even level. Anything you earn above this break even level is your profit.
Break even calculator
Calculate your fixed costs. These are the costs that do not vary, such as office/factory rent, wages, insurance, loan repayments. These costs are sometimes called 'overheads' or 'indirect costs'.
Calculate your variable costs. These are the costs that do vary directly with how much you produce or sell, such as purchasing raw materials, packaging and shipping costs, sales commissions. These costs are sometimes called 'direct' costs as they vary in direct proportion to the activity levels within your business. You may need to take an average over 6 months or so if your sales levels fluctuate.
Your monthly break even level = total monthly fixed costs + average monthly variable costs
How to forecast your sales figures
You now need to work out how many sales you need to make to earn enough income to reach your break even level.
Calculate the average value of each sale you make. To do this add your total sales revenue for a month and divide by the number of sales transactions in that month. You may need to do this over a period of 3 or 4 months to monitor the amount of variation, but over this period of time you should be able to get a very good feel for what is the average amount of money each sale will generate.
The number of sales needed to reach break even point = break even point ÷ average sales revenue
Other useful profit calculations
Calculating Gross Profit
The gross profit margin tells you how much remains from sales after you pay for the cost of the goods sold.
Your gross profit = total sales revenue - variable costs
Your gross profit margin = gross profit ÷ total sales revenue
(multiply the answer by 100 to express as a percentage)
Calculating Net Profit
The net profit margin is an indication of how effective you are at cost control: the higher the net profit margin, the more effective you are at converting revenue into actual profit.
Your net profit = total sales revenue - variable costs - fixed costs
Your net profit margin = net profit ÷ total sales revenue
(multiply the answer by 100 to express as a percentage)
Working out when you break even
What is the break even point?
The break even point is the income you need to earn just to cover all your fixed and variable costs. Any income you earn over and above the break even point is your profit.
Why you need to know your break even sales figure
Do you know how much money you need to earn just to cover your basic running costs?
Do you know how many sales you need to make to earn that amount?
As well as being a necessary component of any business plan, calculating your break even point will give you a specific sales target you need to reach, and it will help you determine on an ongoing basis how well your business is performing.
If you’re not exceeding the break even point you won't be making a profit so you’ll need to put immediate corrective action in place to either:
- increase the number of sales you make
- increase the average sales revenue of each sale
- increase the frequency with which customers purchase from you
- increase the amount of money each customer spends
- reduce your costs
- a combination of any of the above
If your business depends upon a high number of low value sales you’ll probably want to work on a weekly or even daily sales target so you exceed your break even point. If your business does not work on high volume sales a monthly figure for sales target setting and measurement may be enough.
How to measure business costs
Every business has certain costs it must cover in order to stay solvent. These costs will be things such as telephone line rental, office rent, staff wages, purchase of raw materials or stock, and so on.
Costs are classified as either:
- fixed costs - These do not change with the amount of sales you make or goods you produce and are made up of things such as office rent and loan repayments.
- variable costs - These vary in direct proportion to the amount of sales you make or goods you produce and are made up of things such as raw materials and sales commission.
Whether they're variable or fixed the costs need to be met so it’s essential to look at your sales forecasting to work out how much you need to earn to cover all these costs – this is called your break even level. Anything you earn above this break even level is your profit.
Break even calculator
Calculate your fixed costs. These are the costs that do not vary, such as office/factory rent, wages, insurance, loan repayments. These costs are sometimes called 'overheads' or 'indirect costs'.
Calculate your variable costs. These are the costs that do vary directly with how much you produce or sell, such as purchasing raw materials, packaging and shipping costs, sales commissions. These costs are sometimes called 'direct' costs as they vary in direct proportion to the activity levels within your business. You may need to take an average over 6 months or so if your sales levels fluctuate.
Your monthly break even level = total monthly fixed costs + average monthly variable costs
How to forecast your sales figures
You now need to work out how many sales you need to make to earn enough income to reach your break even level.
Calculate the average value of each sale you make. To do this add your total sales revenue for a month and divide by the number of sales transactions in that month. You may need to do this over a period of 3 or 4 months to monitor the amount of variation, but over this period of time you should be able to get a very good feel for what is the average amount of money each sale will generate.
The number of sales needed to reach break even point = break even point ÷ average sales revenue
Other useful profit calculations
Calculating Gross Profit
The gross profit margin tells you how much remains from sales after you pay for the cost of the goods sold.
Your gross profit = total sales revenue - variable costs
Your gross profit margin = gross profit ÷ total sales revenue
(multiply the answer by 100 to express as a percentage)
Calculating Net Profit
The net profit margin is an indication of how effective you are at cost control: the higher the net profit margin, the more effective you are at converting revenue into actual profit.
Your net profit = total sales revenue - variable costs - fixed costs
Your net profit margin = net profit ÷ total sales revenue
(multiply the answer by 100 to express as a percentage)