#BREAK EVEN POINT FORMULA SERVICE HOW TO#

(Note that this number does not include any profit, or even a salary for Antoinette.The Break Even Point is the necessary level of output for a company’s revenue to be equal to its total costs – or said differently, the inflection point at which a company begins to generate a profit.įor all business owners, particularly during the earlier stages of a business, one of the most crucial questions to answer is: “When will my business break even?”Īll businesses share the similar goal of eventually becoming profitable in order to continue operating.Īn unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensating employees, purchasing inventory, paying office rent on time).īy understanding the required output to break even, a company can set revenue targets accordingly, as well as adjust its business strategy such as the pricing of its products/services and how it chooses to allocate its capital. In other words, Antoinette must make $9,000 each month just to pay her fixed costs and her direct (product) costs. Simply divide your estimated annual fixed costs by your gross profit percentage to determine the amount of sales revenue you'll need to bring in just to break even.įor example, if Antoinette's fixed costs are $6,000 per month, and her expected profit margin is 66.7%, her break-even point is $9,000 in sales revenue per month ($6,000 divided by.

The formula for determining your breakeven point requires no more than simple arithmetic. Once you've calculated the numbers above, it's easy to figure out your break-even point. For example, if Antoinette makes an average gross profit of $200 on dresses that she sells for an average of $300, her gross profit percentage is 66.7% ($200 divided by $300). To calculate your average gross profit percentage, divide your average gross profit figure by the average selling price.

This percentage tells you how much of each dollar of sales income is gross profit. (Direct costs are what you pay to provide your product or service.) For example, if Antoinette pays an average of $100 for goods to make dresses that she sells for an average of $300, her average gross profit is $200. To perform a valid break-even analysis, you must base your forecast on the volume of business you really expect - not on how much you need to make a good profit.Īverage gross profit is the money left from each sales dollar after paying the direct costs of a sale. This is the total dollars from sales activity that you bring into your business each month or year. It's also a good idea to throw a little extra, say 10%, into your break-even analysis to cover miscellaneous expenses that you can't predict. They include rent, insurance, utilities, and other set expenses. You'll need to make the following estimates and calculations:įixed costs (sometimes called 'overhead') don't vary much from month to month.

#BREAK EVEN POINT FORMULA SERVICE HOW TO#

Business plan books and software can teach you how to make reasonable revenue and cost estimates. You should do some serious research - including an analysis of your market - to determine your projected sales volume and your anticipated expenses. To perform a break-even analysis, you'll have to make educated guesses about your expenses and revenues. The breakeven point is reached when revenue equals all business costs. The cost of selling $5,000 in retail goods could easily be $3,000 at the wholesale price, so the $5,000 in sales revenue only provides $2,000 in gross profit. For the startup business, it is extremely important to know your startup costs, which provide you with the information you need to generate enough sales revenue to pay the ongoing expenses related to running your business.Ī startup business owner must understand that $5,000 of product sales will not cover $5,000 in monthly overhead expenses. Breakeven analysis is a tool used to determine when a business will be able to cover all its expenses and begin to make a profit.

Break even point formula service