How to Calculate Your Business’s Break Even Point

How to Calculate Your Business’s Break Even Point

Find Your Contribution Margin Recently, I explained how a business calculates its contribution margin -- the amount (ideally in the form of a percentage) that your revenue from sales exceeds your variable costs to develop the product. First, your contribution margin deliberately leaves out your operating costs so you can see exactly how profitable your product is. You need it to calculate your break even point. These costs, also called fixed costs, factor back into your books when calculating your profit margin -- your total profitability after all business expenses paid. Break Even Point A business's break even point indicates when total revenue from sales will be equal to total costs to the business. So why is this number recalculated all the time? For example, if fixed costs such as your monthly office rent total $3000, and your product has a contribution margin of $250 per unit, you'd have to sell 12 units of your product by the end of the month to break even for that month. The business's monthly revenue can even come up short of a month's fixed costs, but break even or declare the business profitable at the end of the year. Just be sure you calculate your break even point first before running a sale or discount so you can set appropriate goals for the sale itself. Now it's time for you to calculate your business's break even point … How'd you do?

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break even point

You’ve heard the term “break even.” It’s a popular way to describe a time when you spent exactly as much money as you made. “We gambled $200 at the casino and won $200, so we broke even.”

But in a business context, it’s not that simple.

Your break even point doesn’t just happen in Vegas, and needs to be constantly recalculated for you to turn a profit in the long term. Here’s how to find it.

Find Your Contribution Margin

Recently, I explained how a business calculates its contribution margin — the amount (ideally in the form of a percentage) that your revenue from sales exceeds your variable costs to develop the product. There are two reasons you should care about this figure.

First, your contribution margin deliberately leaves out your operating costs so you can see exactly how profitable your product is. For example, while software and website costs to an ecommerce clothing business don’t directly contribute to the business’s product (the clothing), the cost its thread vendor charges does. The business omits the first cost because it only wants to see how profitable its clothing is against what it pays to produce it.

The second reason contribution margin is so important? You need it to calculate your break even point.

Although operating costs are irrelevant when assessing a product’s profitability, they’re critical when assessing your business’s profitability. These costs, also called fixed costs, factor back into your books when calculating your profit margin — your total profitability after all business expenses paid. And in order to achieve a high profit margin, you first need to know when you’ll break even.

Break Even Point

A business’s break even point indicates when total revenue from sales will be equal to total costs to the business. As a formula, your break even point is your fixed costs divided by your contribution margin, and the final number can be used as a recurring metric by the business to predict profitability.

Keep in mind that a break even…

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