I’m amazed how many business owners don’t know what the break even point is in there business. They can’t figure out why they are going backwards financially.

I have found over the years that most business owners spend most of there time in crisis management, which means they are not doing what’s truly important. They go to bed at night stressed out wondering how they are going to pay the light bill or cover payroll, why, because they allow crisis to control what, when and where they spend there precious time. To compound the issue, they don’t have a good grasp of which indicators they should be watching on a day-to-day basis. These indicators are different for each business but you will find some common denominators which apply to almost every business.

One of the big indicators is the break even point, it’s one of the numbers that can eat your lunch and kiss your girlfriend and have you wondering what the hell just happened. Before you know it you’re putting locks on the doors and you are out of business. How do you figure out what your break even point is, I’ll try to keep it simple.

The Equation:

To figure out your breakeven point, take your fixed costs, divided by your price, minus your variable costs. As an equation it looks like this:

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

This calculation will let you know how many units of a product you’ll need to sell to break even. Once you’ve reached that point, you’ve recovered all costs associated with producing your product (both variable and fixed).

Above the breakeven point, every additional unit sold increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits. As an equation:

Unit Contribution Margin = Sales Price – Variable Costs

You could put this information into a spreadsheet to easily make adjustments as costs change over time, as well as play with different price options and easily calculate the resulting breakeven point. You could use a program such as Excel’s Goal Seek, if you wanted to give yourself a goal of a certain profit, say $1 million, and then work backwards to see how many units you would need to sell to hit that number.

This is one of those times where ignorance is not a defense, you probably should have covered this item in your business plan…what you say, I was supposed to do a business plan too! Sorry I couldn’t help myself.

Knowing this information will help you see a bigger picture so you can spend your time on important issues rather than every crisis that arises.

Now that you know your Break Even Point, what if I told you how to determine exactly how many additional customers it would take to realize a growth objective of $100,000 with your marketing dollars. Have you heard of The Magic Formula? Until next time.