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Break Even Explained

Breakeven refers to the level of sales needed to cover your costs. Breakeven also represents the floor for pricing... and sales volume... so in order to understand the break even analysis... you'll need to understand a little bit about your pricing.

View This Demonstration, then use the sample at the left.

Break-Even - !

Assessing your idea with a Break-Even Analysis

A good way to assess the feasibility of a business is to look at the break-even point. This is the point at which you are covering all your cost, but not yet realizing a profit.

Example: Anja makes jewelry as a hobby and would like to see if she could turn this into a part-time business, renting tables at a local craft fair or leasing space at flea markets. Her average selling price per piece is $15.00 and supplies to produce an average piece is $6.75. She calculated that her average monthly cost is $100, this would be for table cost, some travel and other costs related to her hobby, plus she would like to draw $300 a month. This would give her a total of $400 per month in average cost.

Breakeven Point = Fixed Costs / (Unit Selling Price - Variable Costs)

Breakeven Point = $400 / ($15.00 - $6.75)

Breakeven Sales Point = Fixed Costs / (1 - (Variable Costs - Unit Selling Price))

Breakeven Sales Point = $400 / (1 - ($6.75 - $15.00)

The above assumption can be utilized to calculate the number of units that must be sold in order to break-even as well as the total dollar of sales needed to break-even. Using the formulas explained, the following calculations can be made:

Make changes to the following average cost and tab to the next field to see the changes in your breakeven.

$ Avg Monthly Fixed Costs(expenses, i.e., table, travel, etc. ):
+
$ Monthly Owner's Draw:

$ Avg Per Unit Sales Price:
$ Avg Per Unit Variable Cost (supplies):

Therefore, no profits are made from the sale of this product until more than
   pieces are sold per month or more than
$ in gross sales is generated per month.

Anja realizes that she can easily make 15 pieces per week (60 pieces per month). If she can sell all 60 pieces each month, she can cover all her expenses, plus a $300 draw and realize a profit of $173.00 (60 pieces x $15 per unit = $900 - $727 (sales breakeven) = $173.00 profit).

The importance of this break-even analysis is that it will quickly tell you if your production estimates are feasible. If you calculate 100 units before breaking even, determine if you can produce 100 units within the month. Also, consider your price per unit. In Anja's example, she found old beads at yard sales and flea markets for very little costs, and made her own which contributed to a lower Variable Costs (supplies), but kept her selling price the same. This resulted in a much lower number of pieces to reach her break-even point.


Or for a service related business, think about it this way:

Bill works for a construction company and has 14 years as a carpenter. He would like to do some "moonlighting" work on the weekends to suppliment his income and possibly see if it might grow into a full time business. Bill thinks that $35 per hour would cover his cost and allow him to take home about $1000 per month.

Bill can see that 16 hours per weekend times 4 weekends is 64 hours. Bill calculates would like to work about 30 hours a month and charge $35 dollars an hour. He needs to rent a small space for storage and will need to get liability insurance. There are a couple of other things, but he thinks $300 per month will cover it.

$ Avg Monthly Fixed Costs(i.e., Storage, Insurance, Telephone, Utilities, etc. ):
+
$ Monthly Owner's Draw:

$ Avg Hourly Rate:
$ Avg Hourly Variable Cost (i.e., gas, vehicle maintenance, taxes, etc.): This would normally be a percentage of your Hourly Rate. We are using 25% for this example.

Bill can see that he would need to bill
   hours or earn
$ in gross sales per month.

This example is a quick look at how many billable hours it will take to reach the goal.

If he can bill 50 hours per month, he can breakeven. 100 percent billable hours is not praticial, and most business counselors will tell you that a better estimate is about 50 percent of your time will be billable (this is not always the case). Bill will figure on about 40 hours of actual billable time which means his draw is about $740 per month. To reach his $1000 goal he either needs to cut his fixed costs or raise his rates.

 

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