Breakeven is defined as the point at which costs equal income – no profit, no loss. It's an excellent starting point for finding out where your business is and where it can go. Breakeven is the first step in planning future growth. It shows how much sales volume you need to cover fixed and variable expenses. Once your company has reached breakeven, all gross profit beyond that point goes directly to improving the bottom line.
Of course, breakeven analysis
has limitations. For example, it ignores the importance of cash flow and makes
the assumption that fixed and variable expenses will stay within the parameters
used to calculate the breakeven point. Despite these shortcomings, breakeven
can help with business planning.
Here's how to calculate your
business's breakeven:
First, review your annual
financial statement to learn your fixed and variable expenses. Fixed expenses
are those that don't generally vary in relation to sales volume. Rent, for
example, usually stays constant no matter the amount of your sales. The same is
typically true for depreciation, utilities, and insurance.
Variable expenses are the
cost of goods sold and other costs of sales, such as direct labor and sales
commissions.
What about costs that are
part fixed and part variable? Split these into separate categories based on
your knowledge of your business.
Next, compute your gross
profit percentage by dividing your net sales less your cost of goods sold by
your net sales. Then divide your fixed costs by your gross profit percentage to
arrive at breakeven.
Example.
Say your fixed costs are $10,000 and your gross profit percentage is 25%. Your
breakeven point is sales of $40,000 ($10,000 ÷ 25% = $40,000).
Too much math? Call us at (518) 798-3330. We're
happy to help you calculate your business's breakeven point and evaluate your
profit structure.
