Understanding Break Even Sales

It is essential for you to understand the flow of money in, through, and out of your business.  For some businesses, this can even be a daily issue.  Positive cashflow (more money coming in than going out) is essential to keep the business going.

So how do you keep more money coming in vs. going out?  Obviously, having a good control on your expenses and payables is essential to controlling what is going out.  Timing is crucial in managing cash.  Making sure that you are collecting your receivables in a timely fashion assures that money is coming in.  Another key cashflow issue is maintaining an appropriate level of inventory and supplies.  Again, a good practical rolling cashflow budget will address all of these issues.

Once you are successfully monitoring your cashflow, the next issue to address is profitability.  A great place to start to look at profitability is breakeven.  The definition of breakeven is the point in your business when your gross profit covers all of your fixed costs.  If you go “above” breakeven, then you are profitable.  So here is the formula:

BREAK EVEN SALES = FIXED EXPENSE divided by GROSS PROFIT MARGIN

This answers the question, how much do I need to sell to pay my expenses?  You can calculate break even for a year, or a quarter, or a month, or even a week.  Let’s go through an example in a small business for one year.

Let’s use a coffee shop.  This coffee shop only sells black coffee!  We’ll deal with marketing in another article!!!  The cost to operate this shop is monthly rent (including utilities) of $750/month, salaries of $ 2,000 per month, and other fixed expense of $500 per month.  They also figured out that the cost for coffee and water is $.10 per cup, and they sell a cup of coffee for $1.25.  You now have all you need to calculate break even.

MONTHLY FIXED EXPENSE = ($2000 + $750 + $500) x 12 = $39,000.

GROSS PROFIT PER CUP = $1.25 – $0.10 = $1.15

GROSS PROFIT MARGIN = GROSS PROFIT divided by GROSS SALES =

$1.15/$1.25 = 0.92 (92%).

BREAK EVEN SALES = FIXED EXPENSE divided by GROSS PROFIT MARGIN

BREAK EVEN SALES = $39,000/.92 = $42,391.30

CUPS OF COFFEE SOLD TO BREAK EVEN = $42,391.30/$1.25 = 33,913/year or 652 per week or 93 per day (if you are open 7 days a week 52 weeks per year).

How can you apply this formula in your business?

If you would like further information or you have any questions about this blog give me a call at 305-899-9963 or email me at [email protected] and we’ll make it happen.

Coach John
“Living beyond the ordinary”

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