Break Even Analysis

Your break-even point is the point at which revenues exactly cover your expenses.

Start by calculating two other numbers:

Fixed costs. Costs you have to meet including wages, rent, leases and administrative costs. They don’t include the variable costs of sales. E.g. Let’s say your fixed costs are $100,000 a year.

Gross profit margin. The percentage of each sale left over after costs of that sale have been covered. It equals total sales minus variable costs, expressed as a percentage.

E.g. If you’re selling somebody elses branded Mineral Foundation, say for $100 a jar which cost $60 - the gross profit is $40 and the gross profit margin is 40%.

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 margin

Using the figures above:

Break-even point = $100,000 ÷ 40%
= $250,000

You need to sell $250,000 worth of that item to break even each year.

Break-even analysis helps you work out:

1. The profitability of your product.
2. How far sales can drop before you start making a loss.
3. The units you need to sell before you start making a profit.
4. The effects of changing your price or volume of sales.
5. If costs increase, how much you have to sell at current prices to cover these costs.