Breakeven Point – Why It Can Make Or Break Your Business
If you could find out how much you needed to sell just to make a profit, you would want to know right?
For such an important number, it is not commonly known in some businesses so how easy is it to calculate?
The type of business you are in will determine how easy it is to calculate this magic number, but if you don’t know how much you need to sell just to breakeven then this is how it done:
The simple formula is = FIXED COSTS divided by GROSS PROFIT MARGIN
So let’s break those headings down:
Fixed costs – these are the costs that exist regardless of how much you sell. Typical examples of these are rent, wages, insurance, telephone etc…
Gross profit margin – this is the percentage of sales proceeds left after subtracting the costs associated with producing the goods sold from the total sales figure.
For every unit I sell for £100 it costs £60 to produce. This makes my gross profit margin 40% (£100 less £60 = £40. £40 divided by £100 = 40%).
If my fixed costs per week are £2,000 then my weekly breakeven figure is £5,000 (£2,000 divided by 40%).
This means I need to sell 50 units per week just to meet my costs and breakeven. Anything above that will be profit.
CHALLENGE– how much does your business need to sell each day/week/month/year just to breakeven?
If you need any help with calculating your breakeven point then please do not hesitate to contact MATCH Accounting.