I Think I am Making Money, am I?

Posted by | August 29, 2010 | Graham Lock's Articles | No Comments

Break Even Point

Wouldn’t it be great to know how many sales you need to make to cover your costs? Or the exact point in each week when you’ve stopped working for your staff, lease and suppliers and started working for yourself? That’s why your break-even point is a handy number to know.

Your break-even point is the point at which revenues (the income from your sales) exactly cover your expenses. You need to start by calculating two other numbers:

  • Gross profit margin. Sometimes called the contribution margin, this is the percentage of each sale that’s left over after the costs of that sale have been covered. It equals your total sales minus your variable costs, expressed as a percentage. Say you’re selling a product for $100 and that it originally cost you $60. The gross profit is $40 and the gross profit margin is 40%.
  • Fixed costs. These are the costs that you have to meet, no matter what. They usually include wages, rent, leases and administrative costs, while excluding the variable costs of sales. Let’s imagine your fixed costs are $100,000 a year.

Once you know those numbers, you can work out how many sales you need to make to break even:

Break-even point =

= Fixed costs

Gross profit (contribution) margin

So, using our product example:

Break-even point =

$100,000

= $250,000

40%

In other words, you need to sell $250,000 worth of product to break even each year. That’s 2,500 products or just under 50 a week. So if you’re averaging 15 products a day, you start working for yourself sometime after lunch on Thursday.

Break-even analysis can be a powerful management tool, because it helps you work out:

  • The profitability of your product
  • How far sales can drop before you start making a loss
  • How many units you need to sell before you start making a profit
  • The effects of changing your price or sales volume
  • How much more you have to sell at current price levels to cover increased costs

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