The “How Do I Break Even?” Formula
I know that you’re not interested in just breaking even. I know that you want to make money in your business. But knowing what quantities you need to sell just to cover your expenses is often super-helpful. If you’re a one-person accounting firm (or some other service business), for example, how many hours do you need to work to pay your expenses and perhaps pay yourself a small salary? Or if you’re a retailer of, say, toys, how many toys do you need to sell to pay your overhead, rent, and sales clerks?
You see my point, right? Knowing how much revenue you need to generate just to stay in the game is essential. Knowing your break-even point enables you to establish a benchmark for your performance. (Any time you don’t break even, you know that you have a serious problem that you need to resolve quickly to stay in business.) And considering break-even points is invaluable when you think about new businesses or new ventures.
To calculate a break-even point, you need to know just three pieces of information: your fixed costs (the expenses you have to pay regardless of the business’s revenue, or income), the revenue that you generate for each sale, and the variable costs that you incur in each sale. ...