What’s your business breakeven point?
If you’re like many business owners, the term breakeven
point might be a foreign concept. However, understanding the role of breakeven point in your
organization is critical to maximize your cash flow and profitability.
In this article, we’ll cover everything you need to know about breakeven point, including what it
is, how you calculate it, and ways to improve your metric.
What is Breakeven Point?
Breakeven point is the point at which your costs equal your revenue, generating a net zero profit.
This calculation is commonly used for businesses selling goods, but it can be applied to other
areas, such as investments. A majority of the breakeven point calculation relies on knowing your
costs. If you aren’t already leveraging accounting software, like QuickBooks Online, now is the
time to start.
Breakeven point is an important calculation to determine how many units your business needs to
sell to avoid a loss. This calculation is also beneficial if you are trying to reach a certain profit
margin. The breakeven calculation can be more difficult to calculate if you don’t sell units, as
services can be subjective.
How Do You Calculate Your Breakeven Point?
Breakeven point can be calculated a few different ways depending on the specifics of your
operations. However, most calculations involve backing into how many units you need to sell.
There are two types of costs you will need to calculate: fixed and variable. Fixed costs are
expenses that don’t change each month, such as rent or insurance premiums.
On the contrary, variable costs can change based on the volume you produce. For example,
maybe it costs you $5.00 to produce each good up to 100. Once you produce over 100 goods, it
only costs you $4.50. Variable costs can include general and administrative expenses as well,
such as office supplies, wages, bank fees, meals, and travel.
Let’s go through a sample problem to help you understand the breakeven calculation. ABC, Inc.
wants to know how many goods they need to sell to break even. Their fixed costs are $50,000
and variable costs are $4.00 per unit. Each unit sells for $6.00. The calculation is as follows:
Breakeven (Units) = Fixed Costs / (Sales Price Per Unit – Variable Cost Per Unit)
25,000 Units = $50,000 / ($6.00 – $4.00)
As you can see, the company will need to sell 25,000 units to break even. Any units that are sold
above 25,000 will result in a profit, while selling below 25,000 will result in a loss. Determining
your fixed and variable costs can be done by utilizing accounting software, like QuickBooks
Online, that tracks your purchase.
How to Lower Your Breakeven Point
Lowering your breakeven point relies on changing the three factors in the equation: fixed costs,
sale price, and variable cost. By lowering your fixed costs, you will need to sell fewer units,
assuming your sale prices and variable costs remain unchanged. Can you renegotiate your
insurance premiums? How about lowering your rent?
Furthermore, one of the easiest ways to improve breakeven is to increase sale prices. Inflation
has been driving up prices in nearly every industry. If you haven’t adjusted your prices for new
unit costs, now might be the perfect time.
Additionally, decreasing the per unit variable cost can also increase profitability and cash flow in
your organization. Can you renegotiate raw material prices with your supplier? How about
lowering your utility bills by implementing energy efficient policies? Finding ways to reduce
your costs can help you achieve your desired profitability.
How many units do you need to sell to break even? Whether you are looking for help calculating
your breakeven point or tailored strategies to increase profitability, BUSINESS has you covered.
Reach out today to schedule your free consultation.