When you reach your sales targets, you may feel successful, but setting the right targets matters more in the long run. Your break-even point, or the moment when your total revenue equals your total expenses, proves one of the most important targets for small businesses to hit. At the break-even point, your company has neither lost nor made any money, and you have to sell past this target in order to turn a profit.
To find your break-even point, you first need to know your contribution margin, or your revenue minus your variable costs. To calculate your contribution margin percentage, divide your contribution margin by your total revenue.
You can calculate your break-even point in two ways:
- To discover the units you need to sell to reach your break-even point, divide your total fixed costs by your contribution margin per unit.
- To find the total sales you need to reach your break-even point, divide your total fixed costs by your contribution margin percentage.
If your have $75,000 in fixed costs, $20 in variable costs per unit, and a $45 selling price per unit, then your contribution margin per unit equals $45 minus $20, or $25 per unit. This means your per-unit break-even point equals $75,000 divided by $25, or 3,000. If your business doesn’t make 3,000 sales, it loses money.
Long-term financial planning and setting an annual budget for your small business requires you to know your break-even point. Let’s say you have an option on a factory with the potential to produce 200 units to sell each month. Even at maximum capacity, this option doesn’t let you create enough product to turn a profit. That makes optioning the factory a loss, even if you sell the entire inventory you create there within a year.
To calculate your small business’ break-even point, you need good data. An organized financial system provides all the information you need to make these calculations. For this type of solid information and more, 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.