As a business owner, you’re in business to generate a profit. But before you make even a dollar of profit you need to know how much to sell your products/services for in order to keep the doors open – in other words, your breakeven point. Many business owners don’t understand fully the breakeven point and as a consequence, don’t stay in business long!
In simple terms, the breakeven formula is:
Fixed Costs divided by Gross Profit Percentage
What are Fixed Costs?
Fixed costs are those costs that exist independently of sales – you have them regardless of the amount of sales you make. Generally fixed costs are constant in price and ongoing such as rent, loan repayments, insurance, telephone, etc.
What are Variable Costs?
Variable costs are costs that are influenced by sales, also known as Direct Costs or Cost of Sales. These include inventory, materials used in production, direct labour costs, etc.
What is Gross Profit Percentage?
Gross profit percentage is the sales less variable costs expressed as a percentage of sales.
Why is Breakeven Analysis Important?
Breakeven analysis is a great tool for managing and controlling costs, as well as utilising it as a decision making tool to assist in setting prices or determining what volume of sales might be needed to break even. If you don’t know your breakeven point, it makes it more difficult to set prices for your products/services, or to determine the volume of sales required to be profitable.
Do you know your breakeven point?