Starting a new business is exciting, scary, rewarding, and exhausting. Generally, in the beginning you’re doing it all: sales, marketing, technical, inventory, bookkeeping, and everything in-between. Learning how to calculate the breakeven point isn’t the first or even the last thing an owner thinks about when launching a business.
So why is calculating your breakeven point so important? Knowing your breakeven point ensures your business has realistic monthly targets and contingency plans to anticipate times of shortfall. It also reduces financial uncertainty and unnecessary struggle in the early days of a business.
What Is a Breakeven Point?
Your breakeven point is the point at which the business turns from a loss to profit.
Calculating a breakeven point for an early stage business is more difficult due to the limited amount of ‘actuals’. Actuals, in this case, are concrete numbers for expenses and sales. The more accurate your actual numbers are for expenses and revenue, the better you can work towards reaching the breakeven threshold sooner.
How to Calculate Your Breakeven Point
Use actual amounts rather than estimates
By using actuals you’re more likely to ensure the expense numbers are correct. For example, knowing you need $1,000 per month to cover your expenses allows you to create a plan of action to reach this specific target.
Use a ‘valley’ month as your time span
Generally, your small business has peaks (periods of higher revenue) and valleys (periods of lower revenue). If you calculate a breakeven over a 12-month period, you may underestimate the amount needed during the slow periods. Using a ‘valley’ month ensures that you cover all your expenses, no matter what stage you’re in at any point of the year.
Start with your fixed expenses
Examples of fixed expenses are rent/lease, insurance, amortization, interest expense, property taxes, and depreciation.
Don’t underestimate variable expenses
Examples of variable expenses are payment processing fees, commissions, and supplies. Over time, you get better at estimating your variable expenses, but during your company’s early stages, the easiest way to determine the variable expenses is to tie it to one unit of sales. Wondering what a unit of sales is? It’s a single time period that you use as a base for expenses and sales during it.
Watch out! It’s easy to overestimate revenue
Most small companies, like yours, overestimate the amount of sales to expect in a month. It’s beneficial to take a conservative stance when calculating expected sales to avoid setting goals that are too lofty for your early-stage operations. You can always adjust these numbers later when things stabilize and/or pick up. Again, use one unit of sale as your benchmark to estimate what is required in terms of time and resources.
Ultimately, there is no one-size-fits all way to calculate your breakeven point. In fact, calculating various breakeven points for different scenarios is the best way to prepare for both the worst and best cases. Most importantly, this process helps you identify a specific target, which then makes it easier to visualize and break the goal down into tangible action steps.
As a small business owner, it’s always a good idea to have a clear picture of your finances. Using an accounting system, such as QuickBooks Online, you can generate a Profit and Loss statement automatically. Learn how today.