As a business owner, what keeps you up at night? You’re probably snickering at that question simply because the list of things could go on and on. Well I’ve had the opportunity to ask that question to business owners many times, and the most prominent answer is, cash flow, or should I say lack thereof.
So wouldn’t it be good to know at what point during the month your business achieves the breakeven point? By the way, breakeven is when total revenue equals total costs. After all, up to the point in the month where your business achieves breakeven you haven’t earned a dime of profit yet. All your money has gone to just pay the business operating costs.
Here's a simple formula to calculate your business break even point...
Here’s the deal with breakeven, the later in the month it takes your business to achieve breakeven the greater likelihood that profits are going to be low and cash is going to be tight. And in some months you might even experience a loss. Then low and behold, a few days later a new month begins and you start all over again paying costs to keep your business operating. And there’s not a darn thing you can do to change the outcome of the previous month. So yes, breakeven, profitability and cash flow leads to some very restless nights.
Now, I’m a big fan of managing a business by the numbers. And there’s a fairly simple calculation you can do that will give you an idea of the amount of revenue your business needs to generate to cover costs and achieve the breakeven point. To calculate your breakeven you will need your Profit and Loss Statement with year to date figures. You will then divide the year to date figures by the number of months it represents to get the monthly average expenses. Using the average will minimize the effect of any unusual expenses in a single month.
You will also need to be familiar with what are the Fixed Costs – these are expenses paid each month even if you don’t make a single sale, and also the Variable Costs – these are expenses directly related to the products and services you deliver. Hopefully your bookkeeping has already separated these two types of expenses, otherwise you’ll have some additional work to do. Now with data in hand you can use the following formula to compute your business breakeven point for an average month.
First you calculate your contribution margin. You do this by taking your Total Income, subtract your Variable Costs, and then divide by Total Income. Here’s a simple example… you have $50,000 of total income, you subtract $10,000 of variable costs, then divide by $50,000, and your contribution margin is .80.
Now to calculate breakeven, you take your Total Costs and divide that by your Contribution Margin, and you now have your breakeven number, which is the total revenue you need to cover total costs. Here’s how it calculates… assuming you have $35,000 of total costs, and divide that by your contribution margin of .80, and your breakeven point is $43,750.
Now taking it one step further, assuming there's 20 business days in a month your business generates $2,500 or revenue per day. Divide your breakeven point of $43,750 by $2,500, and in this example the business will achieve breakeven in 17.5 business days.
So there you have it, a simple formula to help you calculate the breakeven point for your business. Go ahead and calculate yours. It may not be where you want it to be, but knowing it and tracking it will lead to much more peaceful nights, and it will also set you on course to implement new business strategies that will make those numbers move.