Navigating the Break-Even Point for Entrepreneurs
For entrepreneurs, the idea of aiming for a break-even point might raise eyebrows. Isn’t the goal to make a profit, rather than just breaking even?
It might sound like a setback or even a hint of failure. However, understanding the break-even point is a game-changer for your business decisions. At ASE, our goal is to demystify this concept, make its calculation clear, and empower you to use this essential tool effectively. By doing so, you’ll gain insights into your profit zones and areas that might need adjustments.
So, what exactly is the break-even point? Simply put, it’s where your total costs meet your total revenue: no loss, no gain. It is how much your company has to sell to cover all expenses. Beyond this point is your profit.
The analysis helps determine the sales volume needed to cover all operating costs, marking the point where you start making a profit.
To calculate the break-even point, you need three key figures from your income statement:
1. Fixed costs: the expenses you must pay regardless of the business’ revenue or income.
2. Gross profit generated from sales: profit from sales after subtracting direct costs of producing the products or services sold by the company [COGS].
3. Variable costs per sale: not direct costs but costs that change with use of materials, labour, and other production expenses.
Calculating the break-even point with the following simple calculation:
Break-Even Sales = Fixed Costs / Gross Profit Margin %
Example: A company has fixed costs of $1.2 million [fixed costs again are the likes of rent, insurance, property tax, interest expenses, etc. etc.,] and a gross profit margin of 42% [again meaning the percentage of total profit from sales beyond expenses]. This company wants to find its break-even sales and so the calculation would be:
Breakeven Sales = $1,200,000 divided by 0.42 = $2,857,143
Further to this, you can now also determine how many units you need to sell to get to the break even point.
This formula is dividing the break-even sales in dollars by the unit’s sales price: in other words, how many widgets do you have to sell to break even.
Break-even in Units = Break-even Sales divided by Unit Sales Price
E.g. if your unit price is $500 per unit, [merchandise, sales, services, etc.]
You would have to sell how many units?
Break-even Units = $2,857,143/$500 per unit =5714 units
And now to answer the important question: why the break-even point is essential to know?
Reducing the break-even point is a common goal for businesses. This can be achieved by cutting costs or increasing prices. To this end, even a small increase in sales prices, along with stable costs, can significantly boost your pre-tax income. Understanding and actively managing your break-even point is a key skill for entrepreneurial success. Hans Berger, Claude Bagley, ASE
Consider a meeting with ASE
With the concepts above or otherwise, consider either a single meeting or several consultations with our advisory board. It would be invaluable for your business. Whether starting a business or looking to improve your existing business, or even planning to sell your business, ASE can provide valuable and proven advice. Our team and ‘your’ advisors have been CEO’s, CFO’s, Presidents, VP’s, Owners, and/or Professionals of successful Companies, with many years of practical and stellar experience.