All necessary paperwork has been completed, the infrastructure has been laid down, policies have been erected, staff has been hired and you are now open for business. Ready for your journey into the unknown. But there is one thing missing in all this, you don’t really know what sales target you should be setting for your business to achieve profitability. This is where calculating your business breakeven point can help.

What is the breakeven point?

A business breakeven point is the point at which its sales exactly equals its expenses. You are not generating any profit, but neither is your business operating at any loss. It is at break even. Calculating this point helps you determine how many product units you need to sell at a given selling price to break even. Any sales target set above the breakeven point makes your business profitable. This is one of the basics of bookkeeping and accounting.

How can you calculate your business’s breakeven point?

Well, to find your business breakeven point, you’ll need three things:

• The fixed costs of running your business
• The variable costs incurred for producing one product unit
• The price at which you want to sell your product

In case of fixed costs and variable costs, you can also work with approximations if you don’t have exact figures yet. But make sure your approximation is as close to the supposed “real” figures. Once you have these three values, you can then put them into the following formula and calculate your business breakeven point:

Fixed costs ÷(Selling Price – Variable costs) = Breakeven point in units

Here is an example to help you understand better.

Breakeven point calculation – An example

XYZ Business sells mugs. The company has calculated its fixed costs to be $50,000. Its variable costs associated with producing one mug is $0.75. Mugs are sold at $3.00 each.

Using the above information, we can calculate XYZ Business breakeven point.

$50,000 ÷ ($3.00 – $0.75) = 22,222 units

That means to breakeven, XYZ Business has to produce and sell 22,222 units.

If it manages to sell more mugs, those additional sales will generate profit for the company. The breakeven point calculation can also be used for strategy making where accounting for small business might experience a sudden fall in sales. The reason could be any. Political unrest, market volatility or economic recession. In such cases, businesses can work towards lowering their fixed costs or variable costs, as both strategies enable them to lower their sales targets, achieve breakeven and all the while maintain the same selling price. The breakeven point is like a magic number and small business accounting services must include it in their business decision making and cost-volume-profit analysis.

A BONUS read: 5 Steps to Setting Up Payroll for Your Business