If you have ever wondered why business break even analysis is important, this short article and video will help you understand exactly that, and of course how to calculate your break even point
This article and video will help you understand the five most important elements to calculating your sales break even point:
What is a break even point in business?
What does break even analysis do?
How to calculate your break even 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
A business’ break even point, in my opinion, is the most important number for any business owner to understand.
Your break even point.
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.
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.
Read on, or watch this short video for the rest of the detail (and if you like the video, please do join us on YouTube and subscribe for weekly videos, hints and tips)
But for now, let’s start with the basics:
Which is understanding how many units you need to sell in order to break even
How to calculate break even?
Understanding breakeven is a very simple calculation really:
Take the total fixed costs, and divide that by the unit sales price less the unit variable cost:
|Total Fixed Costs|
|Unit Sales Price – Unit Variable Cost|
What are Total Fixed Costs?
The total fixed costs are the overheads in your business.
That is 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.
What are variable costs?
Variable costs are the costs associated with each unit produced.
For example: the 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 on creating your product or service.
But for now let’s just look at the unit sales price less the unit variable cost.
In most businesses, you’re likely to have more than one product or service that you sell, so you need to calculate the average sales and costs
How to calculate average costs and sales:
Average sales value is the total sales value divided by number of units:
|Total Sales Value|
|Total Number of Units|
And average cost of sales is or total variable costs divided by number of units:
|Total Variable Costs|
|Total Number of Units|
How to calculate number of units / items to be sold to achieve breakeven
Let’s look at an online clothing retailer as an example:
Total fixed costs = £100,000
Average sales price per unit = £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.
Average variable costs = £100
They buy a jacket in or a piece of clothing and it costs £100 and then they sell it on for £200
£200 – £100 = £100
|£100,000 (Total Fixed Costs)|
|£100 (Total Variable Costs)|
£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.
How to use number of units required to calculate your break even sales target
Okay, so now we’ve got the 1000 units. 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.
Total break even sales = £200 x 1000
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.
You can break that down further in all sorts of ways:
Monthly breakeven calculation:
If you look at what this business needs to do on a monthly basis, and it needs to sell 84 units at an average sales price of £200 pounds per month, or generate £16,667 of sales.
Weekly or daily break even calculation:
They need to sell 20 units a week or three units a day in order to break even.
What else can you do with Break Even Analysis?
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.
And if your costs increase as they are doing presently, or you put some items on sale, or you employ a new team member, remember this will have an additional impact on your break even point
Breakeven is such an important number for every business owner to understand!
In summary, in order to breakeven your business, you need to know what your total fixed costs are.
Then 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, total fixed costs divided by contribution.
I just feel that the above method is the easiest way to understand your breakeven.
Go away, figure yourself out and have some fun with it.
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