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Break even formula
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How do I calculate my break even figure? | Break even formula

It’s a term that you often hear when people talk about the financial side of running a small business and it’s usually used in each episode of Dragons’ Den. But do you really know what the term “break even figure” means? Even among those with a reasonable understanding of what break even figure means, many couldn’t give you an exact breakeven figure for their business, as is often also the case on Dragons’ Den. Knowing your break even figure is very important and it can benefit your business in many ways. So, what does “break even figure” mean and how can you work out yours?  

What is your break even figure?

  • Your break even figure is the amount of sales you need to make or income that you need to bring in to cover all of your business costs for the period.
  • When you reach your break even figure, your costs and income are equal, which means your business is neither profitable or loss-making.
  • Once your income is more than your breakeven, your business is generating profit.
  • Sometimes people use the term break even point rather than break even figure, but they mean the same thing.

Working out their monthly break even figure is most useful for many small businesses. If you work out a break-even figure for longer periods, you risk not spotting serious problems until it’s too late (ie that you haven’t been breaking even for many months). Some businesses use weekly or even daily break even figures. Businesses faced with significant seasonal fluctuations in demand/sales may adjust their break even figure for months when demand is lower.

Obviously, you need to make more in sales than your breakeven figure if your business is to make a profit. So, rather than your break even figure, you should also work with daily/weekly/monthly sales targets. Exceeding your break even figure can provide the funding you need to grow your business.

The benefits of knowing your break even figure

Knowing what your break even figure can give you a benchmark against which you can measure how well your small business is performing.  

  • For example, if your monthly break-even figure is £3,000 and your total sales are £2,000, then, obviously, your business performance is falling way short of the required level. This could soon create serious cash flow issues for your small business.
  • However, if your monthly sales are £4,500, £1,500 above breakeven, you’ve had a very good month during which your business has performed well.
  • Working out a break even figure for a specific product or service can also enable you to understand how many you need to sell to break even, as well as how well that product or service is selling.
  • Knowing your overall break even figure or break even figure for a specific product or service is essential when you’re setting prices. Once you know your breakeven figure, you can simply add a percentage as margin (eg break even plus 30%).
  • Working out your break even figure enables you to set sales targets, whether for the week, month, quarter, or year.

How to work out your break even figure

Whether you want to work out an overall break even figure for your business or just the break even for a specific product or service, the process remains the same.

  • Calculate your fixed costs

    These are also called “overheads” or “indirect costs”. They are “fixed” because they remain the same regardless of how much you make or sell. They include rent/commercial mortgage payments, electricity, water, wages, insurance, loan repayments, etc. Don’t miss anything out when totalling up these costs, because it will mean your break even figure isn’t accurate, which undermines its usefulness.

  • Work out your variable costs

    Alternatively, these are called “direct” costs and they can include raw materials, packaging, distribution costs, etc. They’re called variable costs because the more you make or sell, the higher they are. Once again, factoring in all of your variable costs is essential.

  • Now add them together

    You arrive at your break even figure when you add together your fixed and variable cost – it really is that simple.

Break even formula unit sales

What if you needed to work out how many product units (ie individual widgets) you needed to sell to break even? Let’s say:

  • you sell your product (a widget) for £10 per unit
  • your variable cost per unit is £2 and
  • your fixed costs are £30,000.

You take away your variable cost per unit from your selling price per unit (£10 minus £2 = £8). To find out how many you need to sell to break even, you divide your fixed costs by your unit price minus your variable cost per unit. So:

  • £30,000 divided by (£10 minus £2) £8 = 3,750 units. So, you need to sell 3,750 units to break even, if your business only makes and sells that widget.
  • If your business sells more than the widget mentioned above, you’ll only need to contribute to cover a percentage of your fixed costs, meaning you’ll need to sell fewer widgets to break even.
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