Understanding Break-Even

One of the start-up business basics is determining break-even – the point where your sales supports your overhead.  Beyond break-even lies profitability.

And while it is just one of many financial ratios we consider – it is a primary decision tool for anyone launching a new venture.  It is the feasibility test.

“In order for the business to hit breakeven, we need to sell 10,000 widgets.  Can we realistically expect to sell 10,000 widgets?”

Breakeven = Fixed Costs/Sales – COGS

For example –
I sell hotdogs.  My cart, licensing, insurance and marketing run about $600 a month.  My food costs per hotdog are $1 and I sell them for $3.

$600/$3-$1= 300 hot dogs a month to reach breakeven.

Further, if I break this down by the number of days I sell hotdogs – 5 days a week (20 days a month) then 300/20 = 15 hot dogs a day to hit break-even.

Most small businesses need to support the owner, so to figure how much I need to sell to make $1,000 a week I add that to the fixed costs.  $1,000 a week for 4 weeks = $4,000.

$4,000 + $600/3-1 =2,300 hot dogs a month or 2,300/20 = 115 hot dogs a day.  So as a perspective business owner, I need to figure out where I can have my cart to make sure I am selling 115 hot dogs a day.

Obviously, changing the pricing impacts the break-even analysis.  If I raise the price of my hot dogs by $1 and assuming all else stays the same – my new break even is $4,600/4-1 = 1,533 hot dogs a month or just 76 hot dogs a day.  Be careful though – raising your prices can impact your sales.  If your customers feel $4 is too much, they’ll go buy somewhere else.  Your pricing needs to be in line with what customers are willing to pay.

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