How to know when you can expect a profit from your business?
The breakeven point (BEP) is the time at which your business covers all of its expenses and then starts to make a profit, or it is the number of units you need to sell in order to break even. Depending on the complexity of your business - this could be very quick if you don't have much in terms of outlay, or it could be several years if you have a large amount of people working for the business who are all drawing a salary, not to mention the usual start up and running costs.
To calculate your breakeven point, you will need to work out your fixed and variable costs. Fixed costs are expenses that do not vary with the amount of sales you make, such as office rent(assuming you don't scale down or up) and administrative salaries. These expenses must be paid regardless of sales, and are often referred to as overhead costs. Variable costs fluctuate directly with sales volume, such as purchasing inventory, shipping, and manufacturing a product. To determine your breakeven point, use the equation below:
Number of units to needed to sell= Total Fixed costs / (unit selling price – variable costs)
Price per unit = 20 units
Therefore number of units (x) needed to sell to break even would be:
x= 6000/(20-10) = 600
So in this simple case we would need to sell 600 units to get our money back.
An alternative method is to use a spreadsheet on a month by month basis based on your incoming sales and outgoing expenses. You will usually start off making a loss in the first few months and gradually those losses should become less and then turn into profits - but remember when you start making a profit on a daily basis this isn't the break even point it is merely a point in your business where you aren't losing more money - essentially you are now starting to pay yourself back and over time you will eventually break even. In the spreadsheet image below you can see that you incur a lot of costs in the first month but don't make any income back. You then start making a profit in the second month and at the end of month 7 you have reached the break even point.
Download the Breakeven Analysis Spreadsheet sample for free.
Remember this is a very simplistic model. You will likely have big fluctuations in reality depending on all sorts of variables that you possibly haven't even considered. You can then use the data to make a graph like below...the light blue bar is the running total - and when that reaches zero - this is your break even point. Plot the Y-Axis to be money and the x-axis the time on a monthly basis.
We created the graph above using Microsoft Office - simply by selecting the cells B1 to F19 and then pressing the F11 key. We then took a screenshot of the graph and cut it down to size in our favorite drawing package.