Definition
The break-even point is the amount of sales you need in a period to cover all your costs exactly, so that you make neither a profit nor a loss. Every dollar above it is profit.
The formula
Fixed costs are the bills that arrive whether you sell or not: rent, wages, insurance, a loan payment. Gross margin is the share of each sale left after product cost. Each dollar you sell contributes that share toward the fixed costs.
A worked example
A stationery shop has fixed costs of $3,000 a month: rent, one wage, power and phone. Its average gross margin is 30 percent. Break-even sales = 3,000 / 0.30 = $10,000 a month.
Open 26 days a month and that is about $385 a day. Sell $450 a day and the extra $65 a day, at 30 percent margin, adds about $19.50 a day of profit, or roughly $507 a month. Sell $300 a day and the shop loses about $660 a month. A daily target is easier to act on than a monthly one.
Common mistakes
- Using sales instead of margin. Dividing fixed costs by 1 (as if every dollar of sales were profit) gives a target far too low.
- Missing a cost. Include your own pay, repairs and licences, or the target is too easy.
- One margin for a mixed shop. If cheap staples dominate, your real average margin is lower than your best sellers suggest. Use the figure from actual sales.
- Treating it as a one-off. Rent and prices change, so redo the sum a few times a year.
A fuller walkthrough is in break-even for shop owners, and the break-even calculator does the sum for you.
Related terms
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