And how do you calculate your breakeven point?
How to calculate your business breakeven point is, in my opinion, the most important number you need to understand in your business in order to make sure you are making and building profit every single day:
This video will hep you understand:
- What is a breakeven point in business
- How to calculate your breakeven point in business
- How to work out how long it will take your business to start making profit
- How many units you need to sell before you start making profit
- How much you need to sell before you make profit
This video talks about the most important number for any business owner to understand.
And that’s your break even point.
So, your breakeven point tells you how much money you need to make, how many units you need to sell, and how long it’s going to take you to first of all, cover your costs and then start to make a profit.
And once you understand your breakeven point, it’s great because you can set all sorts of targets and goals you can do so much with it.
But for now, let’s start with the basics:
And the basics for me, are about understanding how many units you need to sell in order to break even.
It’s a very simple calculation really: You need to take the total fixed costs, and you need to divide that by the unit sales price less the unit variable cost. Total fixed costs – what are they?
The total fixed costs are the overheads in your business.
So that’s everything that you need to pay out before you even open the doors, for example, your rent, your rates, your utilities, your web costs, your people, your equipment, and all sorts of things like that, that you need to pay regardless of whether you make a sale or not.
And the variable costs are the costs associated with each unit produced – either a buying price if you’re buying something and selling it on, or it can of course be freelancers or the time value that you spend.
But for now let’s just look at the unit sales price less the unit variable cost. And again, in most businesses, you’re likely to have more than one product or service that you sell.
So you need to take an average – total sales price divided by number of units, or total variable costs by units – that gives you your average.
Let’s take an example:
Let’s look at an online clothing retailer.
This online clothing retailer has a total fixed costs of £100,000, and their average sales price per unit is £200.
They might have some things that they sell for £1000 and some that sell for £10, but the average sales price per unit is £200.
And then let’s say the average variable costs are £100 – so they buy a jacket in or a piece of clothing and it costs £100 and then they sell it on for £200.
So 200 minus 100 gives us 100, and £100,000 divided by £100 means that the number of units that this example needs to sell in order to break even is 1000 units.
Okay, so now we’ve got the 1000 units. From here it’s very simple to figure out how much in terms of value that you need to sell to break even because we take the 1000 units and we multiply it back by the £200 of the average sales price.
So that means in this example, that this retailer needs to sell £200,000 worth of product per annum to break even and then any anything we sell above and beyond that will start to generate some profit for the business.
So you can break that down further in all sorts of ways: If you look at what this business needs to do on a monthly basis, it needs to sell 84 units at an average sales price of £200 pounds per month, or generate £16,667 of sales.
They need to sell 20 units a week or three units a day in order to break even.
So you can see how you can start to set some targets and start to have some fun. Then you can build into this How much money do you want and how much profit you want to make.
Don’t forget you need to calculate in the amount of tax you’re going to pay as well.
Breakeven is such an important number you need to understand.
In order to breakeven your business, you need to know what your total fixed costs are. And you need to divide that by your average unit sales price less your average variable costs.
Other terms you might come across are contribution or gross profit. So total fixed costs divided by gross profit or total fixed costs divided by contribution per unit.
But often this is the easiest way to understand your breakeven.
Go away, figure your breakeven point out and have some fun with it.
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