How to calculate a breakeven point to help you plan ahead.
The Breakeven Point
Understanding your breakeven point is important in planning budgets and cashflow forecasts. Essentially, it’s the revenue you need to make to cover your fixed costs. Some of the costs of your business (such as rent, insurance, utilities) are relatively fixed – they don’t go up if you earn more or sell more. Other costs, especially the buying costs of the things you sell, are directly proportional to your income. If you sell more, you need to buy more.
Simply put: If your revenue is greater than the breakeven point, you’ll make a profit. If it’s less, you’ll lose money.
The key to understanding how much profit you’ll make (once you’ve passed the breakeven point), is to understand your gross profit margin. That’s the percentage you make on the goods or services you sell: If you sell something for $10 and it costs you $6, you have a gross profit of $4 and a gross profit margin of 40%. Once your sales are above the breakeven point, 40% of each extra sale adds to your net profit and that’s where you’ll start to notice the difference it makes.
The fixed costs of your business have to be paid whether you sell something or not. You’re still committed to paying rent, salaries and other costs – at least in the short term. Costs are rarely completely fixed in the long term but generally, for the time periods we are reporting on, we can treat them as fixed.
If we take the same example of our $10 products and assume that we have fixed costs of $40,000 a month, we need to sell 10,000 products and achieve revenue of $100,000 to break even. At this point, we have a Profit and Loss statement that looks like this:
Now, most of us have more complex businesses that have more than one product, but the general principles still apply. Understanding where your breakeven point is, is vital to setting sales targets and budgets which then flow into your cashflow forecast.
Have a look at the Breakeven Analysis chart in Calxa for your business to see what it shows. It initially assumes that anything defined as an Expense account in your accounting system is fixed and Cost of Sales accounts are variable – but you can change this (in Calxa Premier) by editing the account groups in the KPI Editor.