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A break even analysis tells you how much you need to sell in order to cover your costs of doing business. A break even analysis is particularly useful if the products or services that you sell have costs associated with them, such as the costs of buying materials for your products. This is because every product you sell generates an additional cost - the cost of buying the materials for your product. So, the more you sell, the higher your expenses will be.
In order to calculate your break even point (the point where your sales cover all of your expenses), you will need to know three key numbers.
This is how much money you receive, on average, for every product or service that you sell. Be sure to count any discounts or special offers that you may give to your customers.
If you are building a break even analysis for your entire company and you sell multiple products or services, you will need to figure out the average selling price for all of your products or services, combined. Don’t worry, this is a pretty common scenario since most companies sell multiple products.
This is how much it costs you to deliver your product or service. If you are buying products and reselling them, this number is what you paid to purchase those products. If you are making your own products, your per-unit cost should include the costs of the materials it takes make your product. Typically, salaries are excluded from this number.
If you are selling services, this number is what it costs you to deliver your services. This might include the costs of paper or other materials you use when you are presenting to a client, or the cost of gas that it takes you to drive to a typical client.
In a text-book break even analysis, fixed costs would be defined as the expenses you have even if you don’t sell a single product. Those expenses might include things like rent and insurance. Instead of this text-book definition, we recommend using your regular running costs such as payroll and other normal expenses - what would normally be your “Operating Expenses” on a profit and loss statement.
Don’t worry about getting this exactly right. A good estimate is usually good enough.
Once you know these three numbers, you are ready to perform your break even calculation. Using the calculator above, plug in your numbers and see how many units (ie. products) you have to sell in a typical month to cover your costs. The calculator will also tell you the total revenue you will need to bring in to cover your fixed costs PLUS the costs of delivering your product or service.
Your break even point is where the line on the chart crosses the zero line.
If you have questions about calculating your break even point, please don’t hesitate to contact us on Twitter or Facebook.