What's your business's break-even point?

Are you a small business retailer wanting to add a new store?  Do you own a therapy business and want to hire more therapists to help your patients? Or do you want to start your own IT company soon?  Regardless of your industry, creating, growing, or changing your business will inevitably impact its income and expenses.  Finding your breakeven point in business is important, whether you're starting a new business or managing an established business.  Many small business owners and managers don't fully understand how a business's breakeven point can change over time.  What is a Breakeven point?  It is a point where the business's revenue (income) is equal to the costs (expenses), and there is neither a loss nor a profit. In other words, it is figuring out how much the business needs to sell or earn to cover all of the expenses and costs.  We will take a deeper dive into how you can calculate your business's breakeven point.  However, before calculating the breakeven point, it is essential to ensure you are working with solid numbers.  This means working with accurate and complete financial information, which will help ensure the accuracy of the breakeven point. If you are working with bad or questionable numbers, it will lead you to a bad analysis of your breakeven point and can potentially lead to you making bad decisions.  It is best to work with your accountant on this, as they can help you put together a lot of information needed to calculate the analysis. 

In order to calculate the Breakeven Point, you must first determine your sale price per unit, number of units to be sold, variable costs per unit, contribution margin, and fixed costs.  Once you have put these numbers together, you can calculate the Cost-Volume-Profit analysis, which will then help you calculate the business's breakeven point.

What is a Breakeven point?

• It is a point where the business's revenue (income) is equal to the total variable and fixed costs (expenses), and there is neither a net operating loss nor a profit. In other words, it is figuring out how much the business needs to sell or earn to cover all of the expenses and costs.

• With this, you can calculate the following:

  • the amount of total revenue (sales) you need to break even

  • The number of units you have to sell to breakeven (assuming sales price remains the same)

What are variable costs?

• These are costs that vary in total but stay the same per unit.  The total varies based on the sales volume.  For example, if the cost of a good sold is $5 per unit and the business sells 10 units, then the total variable cost is $50, but if it sells only 5 units, then the total variable cost is $25.

• Here are common examples of variable costs:

  • Cost of goods sold

  • Shipping cost

  • Sales commission

  • Merchant fees

  • Any other costs directly traced to a sale of each unit

What are fixed costs?

• These are costs that stay the same in total but vary per unit.  For example, if office rent cost $1,000 per month, that rent will be fixed so if in January the business sells 100 units, the fixed cost per unit would be $10 ($1,000/100 units), but if in February the business only sells 50 units, the fixed cost per unit would be $20 ($1,000/50 units), but the total fixed cost would still be $1,000 for rent for February.

• Here are common examples of fixed costs:

  • Employee salaries

  • Rent

  • Insurance

  • Other costs not directly traced to each unit

What is contribution margin?

• It is the revenue (sales) less the variable costs, in total or per unit

The breakeven point analysis may help you with making important business decisions such as:

• Pricing - figuring out how much you should sell your product or service for?

• Volume - How many products, clients, or billable hours do you have to sell?

• Managing costs - What are the business's variable, fixed, and mixed costs that affect the business's profits?

• Strategic planning - If you want to target a certain profit amount, what price or volume do you need to achieve that?

Here are some common examples of when to use and calculate a breakeven point for your business:

1. Adding a new store or location

2. Launching a new product or service

3. If you plan to start a new business

4. If you are an existing business and the cost structures have changed significantly since the business started

Here is the formula to calculate the breakeven points for the number of units to sell and total revenue (sales): 

• Breakeven Units = Fixed Cost ÷ Contribution Margin per Unit

  • Another option: Fixed Cost ÷ (Sales Price per Unit - Variable Cost per Unit)

• Breakeven Revenue (Sales) = Fixed Cost ÷ Contribution Margin %

  • Another option: Fixed Costs ÷ (Sales Price per Unit ÷ (Sales Price per Unit - Variable Cost per Unit))

It is important to note that there are assumptions and limitations to the analysis, including:

• Because you are working with hypothetical scenarios, even if you are working with actual figures, the results of the analysis and calculations would be estimates, and the actual results may be different

• It assumes that the prices are constant, so, for example, if there are any sales volume discounts, those won't be factored into the calculation

• It assumes that costs (expenses) are accurately divided into variable and fixed costs

• If you sell multiple products or services, it would be assumed that the sales mix is constant

We have attached an Excel file for you to plug in the Case example information below and use it for your business.  There may be softwares available to help you calculate the breakeven analysis.

Example of Breakeven Analysis Spreadsheet.xlsx

Download XLSX • 22KB

Case example:

To keep this simple, let's say you own a retail store that sells only t-shirts.  It only has 1 store location, and sells only 1 type of t-shirt.  Using the information below, you can prepare a breakeven analysis to help answer, "how many t-shirts would it need to sell to break even?" and "how much total revenue would it need to break even?".

Here are the sales prices and volume (# of units sold)

1. Price per t-shirt - $80.00

2. # of t-shirts to be sold - 10,000

Here are the variable costs for each t-shirt

1. Cost of one t-shirt - $25.00

2. Sales commission for one t-shirt - 5.00% of total revenue

3. Merchant fees for one t-shirt - 2.00% of total revenue

4. Shipping cost for one t-shirt - $3.00

Here are the fixed costs to run the store for one year:

1. Facilities (rent/utilities/repairs) - $36,000

2. Payroll - $150,000

3. Insurance - $2,500

4. Professional fees - $18,000

5. Marketing and Advertising - $24,000

6. Supplies and equipment - $8,000

7. Other general admin - $5,000

The following costs are excluded in this example for simplicity.

• Depreciation and amortization

• Other income and expenses

• Taxes

Here are the steps to calculating the breakeven (cost-volume-profit) analysis and the results from the example above:

1. Calculate the total revenue (sales price per unit x # of units)

   1. Example = $800,000

2. Calculate the total variable costs (variable cost per unit x # of units)

   1. For % variable costs, you want to calculate it (% rate x total revenue)

   2. Example = $336,000

3. Calculate the total contribution margin (total revenue - total variable costs)

   1. Example = $464,000

4. Calculate the total contribution margin % (total revenue ÷ total contribution margin)

   1. Example = 58%

5. Calculate the total contribution margin per unit (total contribution margin ÷ # of units)

   1. Example = $46.40

6. Calculate the total fixed costs (sum up all the fixed costs)

   1. Example = $243,500

7. Calculate the total net operating income or loss (total contribution margin - total fixed costs)

   1. Example = $220,500

8. How many t-shirts would it need to sell to break even? 

   1. Example = The business has to sell 5,248 t-shirts to breakeven

9. How much total revenue would it need to break even?

   1. Example = The business has to have a total revenue of $419,828 to breakeven

Here is a chart illustrating the breakeven point using the example above.  The breakeven point is where total revenue intersects total costs.

There are plenty of times when juggling a hundred things, running your business, or planning to start your business, that the finances and important questions like "how much do I have to sell to start making a profit?" can sometimes get overlooked.  Taking the time to make it a process to plan, calculate, estimate, and repeat it as the business grows, calculating the breakeven point can help with maintaining a healthy business and healthy profit.