Break Even Analysis Formula – Online Calculator
When it comes to the break even analysis formula, goal setting comes to my mind. So exactly what is break even? Well, it’s the point where your company has made enough revenue that you didn’t make any money and you didn’t lose any money. You’re dead even and on the cusp of being profitable.
For many businesses, hitting break even is one of those first early goals. It’s the point where an owner can wipe their brow and say, I might not be making any money, but I’m certainly not losing any either. It’s a good feeling, because the next dollar earned should put them into profitable status, even if they’re not rolling in the money.
So, today, I’m going to show you how to calculate your break even. And for those who just want to get the numbers and run, I’ve added a nice little break even calculator for you also. Still, I highly recommend trying to accomplish break even calculations on your own first. After all, you won’t always have my website up in front of you (though you should :)). And besides, the calculations are quite simple. It’ll be a great tool to have under your belt.
Startup Vs Ongoing Expenses – Gotta spend it to make it
The first thing you’ll need to determine your break even is all your expenses. I classify expenses into two major categories. There are startup expenses. Startup expenses include everything you need to open your doors on day one. It might include your marketing & advertising, employee training, website development, inventory, deposits (lease, utilities, etc), rent, supplies… the list goes on and on, and startup expenses will vary by industry and your business model. And though slightly different, I like to throw expansion expenses in this category also. An expansion expense would include anything you need to fund in order expand.
The other type of expense are the ongoing ones. Once you’re in business, you’ll typically need to spend money in order to continue earning money. You might find that some of your startup expenses continue to be ongoing expenses. For example, you purchase your domain name and hosting package, but continue to receive bills monthly, annually, or every few years. The due dates can also vary for ongoing expenses. For example, you might pay your employees weekly, bi-weekly, or even monthly. Ongoing expenses might even vary by sales. Consider commission, for example. It’s only paid when there is a sale.
Fixed Vs Variable – Turnover and overhead
Fixed costs are often called overhead costs. These are the costs of doing business regardless if you ever make a sale. An example of a fixed cost would be the renewal registration for your website domain name. It doesn’t matter how much or little you sale, the registration will be the same amount. A fixed loan payment, would be the same.
Variable costs fluctuation based upon sales. I mentioned commission earlier. This would be an example of a variable costs. Inventory would be another example. Typically, you buy new inventory once you sale the old. Typically, the greater the turnover, the better. As a side note, the purchase of inventory would be considered the cost of goods sold.
Not everything fits in a nice neat package. Some expenses are hybrids. Take a lease, for example. The landlord doesn’t care if you’re not making money. You’re responsible for paying your lease, regardless. In many cases, your lease will be a set amount regardless of how much you make. However, a lease can also include a variable amount, such as you see in malls. In this case, the tenant is charged the fixed cost of occupying the space, plus may pay a variable cost based upon sales.
Calculations Made Easy
Once you determine your expenses, broken down by fixed and variable costs, you’re ready to begin your calculations. In this example, we’re going to do our break even calculations for a 12-month period. However, you can do a break even calculation for however you want, depending on your particular need. For instance, someone might want to do a longer break even analysis if they’re a startup and want to determine their break even for something like a period of 5 years.
To begin, determine all your costs for one year, broken down by fixed and variable expenses. Next, determine what you charge for your product, service, or hourly rate.
Before I give you the calculations, I want to set you up with a scenario to work with. Let’s say I custom design t-shirts. My fixed expenses include my advertising costs ($800/mo), my loan payments for my startup expenses ($500/month), and membership dues ($300/year) for a total of $10,500 a year. My variable costs are $2.75/per shirt, $4/screen (70 shirts), and ink ($3.50 for 70 shirts) equals $200 for a set of 70 shirts. Let’s say it costs me $100 in labor to setup the machine, bringing the total to $300. We’ll say a minimum order is 70, which we’ll consider one unit. So the variable cost of one unit is $300. We’ll sell our shirts for $15 each. Which means 70 shirts would retail $1,050.
Now for the formula! Breakeven = fixed costs/ (unit selling price – variable costs)
So, in the scenario above, you’d have
Breakeven = $10,500 / ($1,050 – $300)
Breakeven = $10,500 / 750
Breakeven = 14 units
Therefore, I would need to make 14 sales to make breakeven or $14,700 in sales revenue. Remember, we decided that one unit sell is 70 shirts at $15 a piece. If 70 shirts retail at $1,050, then 14 units (70 shirts) equals $14,700.
Real-Time Break Even Calculator
Now that you know how to calculator your break even, I’ve provided a calculator for you to check your work. FYI, I’m not the greatest programmer, so if you try to break the calculator, you probably will. 🙂
Break Even Calculator
Only enter numbers as shown in the examples below.= Retail Unit Price
= Variable Costs
= Fixed Costs
Break Even =