What is Breakeven Analysis?
Breakeven analysis is an important metric to use for companies just starting out and companies still in the early-stages of their development. It involves calculating the point at which your company’s total revenues cover your total costs. Once you surpass your breakeven point, your company is generating a profit.
The breakeven point can change based on a variety of factors, such as changes to fixed costs, variable costs, and sales prices. Keep in mind breakeven analysis is also based on assumptions. For example, an assumption that all units are sold, forecasts are reliable, and the external environment is stable.
How to Calculate Breakeven Point
- Calculate Gross Profit: This is how much you make on every unit. For example, if your product costs $50 and you sell it for $70, your gross profit per unit is $20.
- Identify Fixed Costs: For example, if we spend $1,500 in office rent, $200 in utilities, and $300 on equipment, our fixed cost is $2,000.
- Divide Fixed Costs by Gross Profit: By dividing your fixed costs by the profit you make per unit, you find out how many units you need to sell. $2,000/$20 = 100
- Calculate Sales Figure: Multiply the breakeven point you calculated in the last step by the price per unit and you have a sales figure. 100 * $70 = $7,000.
Using Breakeven Analysis in Daily Operations
Prices: After calculating your breakeven point, you may find your current price is too low to be able to reach breakeven within your desired timeframe. Research comparable items and consider raising your price, but not too high to price yourself out of the market.
Cost of Materials and Labor: In order to lower your costs, look into how you can reduce costs while maintaining your desired level of quality.
New Products: You should take into account the new variable costs and fixed costs of launching a new product. This may be the cost of design and any promotion fees.
Planning: Setting long-term goals is easier when you know exactly how much you need to make. For example, if you plan on moving your business into a larger space with higher rent, you can use our calculator to find out how much more you need to sell in order to cover the new fixed costs.
Goals: Goals are an important part of growing a company. Knowing how many you need to sell or how much money you need to make in order to breakeven can be a powerful motivational tool for you and your team.