Break-even is a Widely Misunderstood Calculation

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Here's a quick and easy way to calculate the break-even point for your business, and a FREE download tool to calculate your own break-even!

There can be many complex methods that require charts to decide the break-even for a business. Whilst this may be required for medium to large manufacturing operations with a complex array of products to monitor on an ongoing basis, for most of us we just require a quick and dirty way to calculate break-even.

Also did you know that by tweaking the break-even formula we can set a desired profit level for our business? More on this in a moment.

Break-even is a point when a business sells a certain number of units that cover all business expenses (note: – the business has not made a profit at this point). These units can be products or items of service. We will cover this process for a service-based business in our next newsletter issue so stay tuned for this!

So here goes, break even is the volume of sales (or sales dollars) required to cover fixed expenses (overheads).

The Process: (1) Sales – cost of goods = gross profit (GP), (2) GP/sales = GP% (margin). As I said earlier there are many long-winded ways to explain break-even, here is a quick and easy way to calculate this.

Here is an everyday Profit & Loss Report snapshot:

_Table 1 PIX 2

What you do here is look at 2-areas, fixed costs and gross profit % to sales. Remember here that the % cost of goods sold will remain the same, as of course does the $ value of the fixed costs.

So then divide the fixed costs by the gross profit (0.40), then you get 30,000/0.4 = $75,000 and this is the level of sales required to break even.

This means that at the sales level of $75,000 there is 0 (zero) profit dollars as can be seen in the revised profit & loss report (table 2) below.

_Table 2 PIX 2

Note: Gross profit is sometimes referred to as contribution margin. This is because it contributes towards the operating costs (overheads or fixed costs) of the business.

Force net profit: This is a really cool way to calculate your desired net profit, using part of the same formula that we just used for establishing break even. And I have a great Free tool for you to help you do this (see the bottom of the page).

So we know to find the break-even value using the examples in Table 1 and Table 2 above. First we need to look again at our break-even result in Table 2.

We know the following:

% cost of goods sold (this does not change) see 2 in table 2.
% gross profit (this does not change) see 3 in table 2.
Value of fixed costs = $30,000 (this does not change) see 4 in table 2.
So to calculate your desired net profit simply add this value to the break-even formula, as follows, say you want to achieve $15,000 net profit for your business, the force net profit formula is:

= fixed costs + desired net profit value/gross profit %

= 30,000 + 15,000/0.4

= 45,000/0.4 = 112,500

So to achieve a desired net profit of $15,000, you therefore, need sales of $112,500.

Refer to table 3 below.

_Table 3 PIX 2

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