The best way to make more profit from your business: avoid losses. Seems simple right? But how do you avoid losses? How do you calculate turnover to ensure costs are covered make a profit? Break-even point.

The key is knowing your business’s break-even point. Knowing your break-even point allows you to set pricing and sales targets, to avoid losses and, turn a profit.

Break-even point
Break-even point

Break-even point

The break-even point is where your total revenue (sales or turnover) equals total expenses. At this point, there is no profit or loss. You cover all expenses.

TOTAL REVENUE = TOTAL EXPENSES

The calculation is simple. You need three pieces of information: fixed costs, variable costs, and gross margin percentage.

Fixed costs are incurred every month regardless of revenue amount. Think rent, electricity telephones, any payroll not impacted by sales volume.

Variable costs are incurred in making a sale. Variable costs include the cost of your product and associated costs like freight inwards, packaging, sales commissions. If you sell a service, the variable cost is the cost of labour and materials to deliver the service.

Gross margin % is calculated by subtracting the variable costs from sales value and dividing the result by the sales value. For example, sell a $100 product, with variable costs of $30, the gross margin is 70% (gross margin =(100-30)/100).

Calculation

FIXED COSTS / GROSS MARGIN %

If your business has monthly fixed costs of $10,000 and a 70% gross margin, needs to turn over $14,285 in sales each month to cover costs.

$10,000 / 70% = $14,285

With a sale price of $100 per unit, sales of 143 units are required. (14,285 / 100). Every sale over 143 is a profit.

If your profit target is $7,000 per month, you need to sell 243 items – 143 units to cover costs + 100 units to make the profit (100x $70 gross margin).

Conclusion

When you know the break-even point of your business, you know how much you need to sell to cover your expenses. Setting sales targets for profitability becomes very easy!