Recently a new client that we met with, complained he was struggling to be profitable. We asked him if he knew what his ‘breakeven’ sales point was. With a furrowed brow… the answer of the business owner was no.
He said he kind of set sales targets, but wasn’t exactly sure if those sales would be profitable or not.
We had a chat about why ‘breakeven’ sales point is vital to ensuring profitability in business. Whilst we understand the objective in business isn’t to ‘breakeven’, it’s a good start to avoiding losses and helps you to work out what targets you need to set to achieve desired profitability.
Effectively you work out what is the gross margin that you make on your sales. For example if your product or service costs $600 to produce and your sale price is $1,000, your gross margin is 40%.
Then you work out your regular monthly overheads or ‘fixed costs’ i.e. those that you pay every month, whether you make sales or not. This includes things like rent on premises, admin wages, insurances etc.
To work out your breakeven sales point you divide your monthly overheads by the gross margin e.g.
- Monthly Overheads = $ 40,000
- Divided by Gross margin = 40%
- Breakeven sales point = $100,000
You can see here that you need to sell $100,000 to cover costs of $60,000 and overheads of $40,000.
We’ve set up a nice little calculator to help you work this out, as well as how many sales you need to make to meet ‘breakeven’. It also calculates how much more you need to sell to achieve your desired profitability.
Contact us to get your FREE calculator or if you’d prefer a ‘no obligation’ chat with someone to discuss your profit and cash flow issues please click here.