For any business, knowing how much sales are needed in order to turn a profit is essential. Obviously, a company must generate a profit in order to be effective. By calculating the break-even point, you can determine if your company is profitable or not, and how much revenue or units sold you need in order to be so.
The break-even point is referred to as the point at which your total revenue equals your total cost. Any revenue gained beyond that point is considered profit. This break-even analysis using revenue is called revenue break-even. Keep in mind, we can also do this calculation by swapping revenue for units, determining how many units we need to sell in order to be profitable. This analysis is called unit break-even.
Now let’s put the calculations into practice by using this simplistic example:
Let’s assume you own a burger joint and want to know how many hamburgers you need to sell in order to make a profit. You determine that each burger costs you $5, your selling price for each is $10, however, you also have monthly fixed costs of $5,000 for rent, the cook’s salary, and some advertising.
Let’s determine where your unit break-even point is:
Breakeven (units) = Fixed costs/ (Selling Price – Var. Cost)
Breakeven (units) = $5,000/($10-$5)
Breakeven (units) = 1,000 hamburgers
Therefore, you would need to sell 1,000 burgers to break-even. Any burgers sold after that would be considered profit.
We can take this a step further and calculate our revenue break-even:
Breakeven (revenue) = breakeven units X price
Breakeven (revenue) = 1,000 X $10
Breakeven (revenue) = $10,000
Therefore, you would need to sell $10,000 to break-even. Any dollars earned after that would be considered profit.
Time to put it into practice yourself:
You now have the tools necessary to determine whether your business is profitable or not and how much revenue or units you need to sell in order to do so. It is true that this is a simple example of how to calculate break-even and more complex businesses will have more numbers to take into account. However, the calculations are the same. Hopefully, this lesson will have gained you the knowledge necessary in order to determine if your business needs some adjustments!