How to Calculate the Breakeven Point of Your Startup

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How to calculate the breakeven point? The breakeven point is the point at which your total revenue will equal your total costs. If you sell more than this amount, then you are making a profit. If you sell less than this amount, then you are losing money. A positive breakeven point can also be an excellent indicator of your startup traction.

It’s a line that separates profits from losses. You should look at this holistically, and may calculate your break-even point for every product or service you offer. Once you’ve figured out how much it costs to produce your product or service, you can then determine exactly how much you need to sell in order to break even.

You can use this information to make sure that not only do you have enough capital on hand to start production, but also that once production starts, you’re making money instead of losing it.

Calculating the breakeven point of your new business is critical to understanding how your business can turn a profit, and how much money you need to survive until then.

The Importance of the Breakeven Point

In business, knowing how to calculate the breakeven point is an important concept. If you’re just starting out, it can help to clarify how your new business will be financed, what operating costs you can expect, and how much sales volume you’ll need to achieve a profit. Or at least until the business can financially support itself.

If you already have a business and want to improve profitability, breakeven analysis can be very revealing. You might find that certain products or departments aren’t profitable enough. Or that increasing sales volume would help bring you closer to the breakeven point. In fact, it’s common for businesses to use the break-even point calculation as a catalyst for profit improvement strategies.

The point at which total revenue equals total expenses is known as the breakeven point. It is important because it is the point where a company neither makes nor loses money. A business needs to know its breakeven point so that it can manage its expenses and income to ensure that it stays in the black.

If a company does not know its breakeven point, then it cannot make informed decisions about how much to invest in equipment and inventory. It also cannot calculate whether or not certain projects will be profitable and worth pursuing. By understanding their break-even point, businesses can make better decisions about how to operate as well as grow their profits.

Performing a Breakeven Calculation

Divide total fixed costs by the difference between the unit price and variable expenses to get the breakeven point. It is worth mentioning that fixed expenses are presented in this formula as a total of all overheads, but variable costs are represented as per unit expenses, which is the price for each product unit sold.

The denominator of the calculation is the contribution margin, which is price minus variable expenses. After variable expenditures are deducted from the price, whatever is left, the contribution margin, is then available to cover the company’s fixed costs.

There are two methods for how calculating the breakeven point:

• Method 1. Based on the amount of income required to break even.
• Method 2. Based on the number of unit sales required to pay your expenses.

Method 1. (Based on the amount of income required to break even)

Divide your fixed expenses by your contribution margin.

Break-even point (unit sales in $) = fixed expenses ÷ (average price – variable expenses)

Example: Assume your business has $150,000 in fixed expenses per month. The contribution margin is 15 percent. As a result, your business meets its breakeven sales level at a monthly sales barrier of $1,000,000.

15% of $150,000 is $1,000,000

Method 2. (Based on the number of unit sales required to pay your expenses)

Divide your fixed expenses by the revenue per unit, then subtract the variable expenses per unit.

Break Even point (units) = fixed expenses ÷ (revenue per unit – variable expenses per unit)

Example: Assume your best-selling product has an average selling price of $100. The fixed monthly expenses are $1,000, while the variable costs are $50 per unit. Using the formula above, you need to sell 20 units every month to break even.

$1,000 ÷ ($100 – $50) = 20 units

The breakeven point is the point where the total sales and total expenses are equal. The breakeven point will occur when the total revenue equals the total costs. Knowing how to calculate the breakeven point of your startup’s operations will ensure long-term success and liquidity. Take the time to study and understand these methods carefully.

BIO

Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star, Barbara Corcoran and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.

Most recently, Alejandro built and exited CoFoundersLab, which is one of the largest communities of founders online.

Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding, where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).

Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business.

Alejandro has been involved with the JOBS Act since its inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.