Do you know how many products your business needs to sell in order to cover its costs? This article will discuss how to determine the break-even point for your business. Break-even analysis is useful in determining the amount of sales that your business requires in order to start making a profit.
To calculate the Break-Even Point for your business:
1. Determine your Fixed Costs: Fixed costs are those costs that you cannot avoid paying. For example, rent, utilities, and insurance payments are usually considered fixed costs. If you own a salon and you spend $800 per month on rent, $300 on insurance, and $100 on utilities, your monthly fixed costs are $1200.
2. Calculate Sales Revenue: This has to be a realistic projection of your revenue per sale and/or per month. If you think that you will do 100 haircuts per month and you will charge $20 for each haircut, your revenue per sale is $20 and your monthly sales revenue is $2000 ($20 * 100).
3. Calculate Gross Profits: This includes whatever money is left over after you pay for the costs of making the sale. If you spend $5 for each haircut ($1 for shampoo and $4 for employee salary), your average gross profit per sale is $15 ($20-$5) and your gross profit per month is $1500 ($15 * 100)
4. Calculate the Gross Profit Percentage: This is calculated by dividing the average sales revenue from the average gross profit. In this case, the gross profit percentage would be 0.75, or 75% ($15/$20). This means that for every dollar earned, 75 cents is profit.
5. Calculate the Break-Even Point: Now you can divide the fixed costs by the gross profit percentage to find how many units you need to sell to break even. Your break-even point is $1600 ($1200/0.75), or 80 haircuts per month ($1600/$20).
Because you expect to do 100 haircuts per month, you will earn enough money to cover your costs and make a profit. However, if you do less than 80 haircuts in a month, your business will lose money. If you make exactly 80 haircuts, you will break even and will be able to cover your expenses but will not make a profit.
Tip: If you cannot break even, you will need to find a way to reduce your break-even point. For example, you could consider working from home to avoid the rent expense, finding a less expensive source of supplies, or increasing the price of your products or services.
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