What Is My Break-Even Point?
A break-even point is the point at which your business is neither making nor losing money. You have $0 in profit and $0 in loss.
What do I include in my break-even point?
To understand a break-even point, we first need to talk about variable costs, fixed costs, and if labour is fixed or variable. From there, we will discuss a sales price and then finally get into the formula you can use to find your break-even point.
What are variable costs?
A variable cost is the cost that changes or increases the more products you make.
This means Costs of Goods to make or sell your products or services, labour costs, and anything else that is directly tied to creating your product or service. For a coffee shop, this would be coffee beans, tea leaves, cups, lids, water, milk (and alternatives). For labour costs, you can consider front line staff, chefs, baristas, etc.
What are fixed costs?
Fixed Costs are costs that you have to pay regardless of any income you might make.
This is also called Operational Expenses; rent, salaries, marketing, utilities, subscriptions, accounting and bookkeeping, etc.
Is the labour fixed or variable?
Typically, employees who are directly involved in preparing the products or services is considering variable. Operational employees are considered fixed. These employees are usually in salaried positions and backside of the business; in administrative roles, management roles, and some tech roles.
Calculating the Break-Even Point
Sales Break-Even
Fixed costs (FC) per month: $5,000
Variable costs (VC) per unit: $1.50
Sales price per unit (SP): $3.50
Contribution Margin (CM or Gross Margin): 57%
Break-even: FC/CM = $8,751
Unit Break-Even
Now that we know what fixed and variables costs are, we can go into your accounting software and find the costs.
Fixed costs per month: $5,000
Variable costs per unit: $1.50
Sales price per unit: $3.50
Break-Even: FC/(SP-VC) = 2,500 units.
Product Mix Break-Even
If you have a variety of products, and you know generally the product mix ratios, you can find out how many of each product you need to sell.
Simply put, if you sell Coffee, Tea, and Lattes, you can make some assumptions:
Coffee is 65% of your sales; Tea is 20% and Lattes 15%. These three products come together for 100% of your sales.
Take that product mix and apply it to Unit Break-Even and Sales Break-Even. Now you know how much of each product you need to sell to break-even.
Are you ready to focus on how to get to a break-even point? Set goals and achieve them with the help of Signal Operations.