May 20, 2020

Guide to Calculating Your Business’s Break-Even Point

Breaking even is a huge milestone for every business. The break-even point (BEP) is the exact stage where your revenue finally equals the costs, and you’re on the edge of officially becoming a profitable business. If ever there was a moment to pop the champagne and do a little jig, reaching your break-even point would be it.

You should calculate your break-even point before you even open your business’s doors. This number tells you what it’s going to take (as far as sales and expected costs go) to eventually start making money. If your calculations don’t work out on the napkin, then it’s likely the business idea (or at least the pricing and efficiencies) aren’t going to work out in the long run.

First, let’s walk you through how to calculate your business’s break-even point. Then, we’ll show you how you can adjust your business’s strategy to make that milestone a reality.

How to Calculate Your Break-Even Point

Break-Even Point = Fixed Costs / Contribution Margin

Let’s break this formula down.

  1. Calculate your fixed costs. These are expenses like rent, salaries, property taxes, insurance, etc.
  2. Determine your contribution margin. Contribution Margin = Price of Product – Variable Costs. Your variable costs are expenses that fluctuate with production and sales, like the price of labor, commissions, or cost of direct materials.
  3. Divide your fixed costs by the contribution margin.
  4. Presto—there’s your break-even point! That’s how many products you’ll need to sell to make your revenues equal to your expenses.

Your product prices and costs will change from time to time, so you’ll need to recalculate your break-even point every time you make a change.

How to Use Your Break-Even Point

Now that you know your break-even point, you need to make strategic business decisions to reach it. You may crunch the numbers and nearly have a heart attack when you realize how many products you need to sell—but don’t panic! There are a few levers you can pull to manipulate this number and make your break-even point more realistic:

With your break-even point on paper and your strategy in the making, you’re well on your way to turning your business into a profitable endeavor. Do the math, then make it happen!

About the author

Jesse Sumrak
Jesse Sumrak is a Social Media Manager for SendGrid, a leading digital communication platform. He's created and managed content for startups, growth-stage companies, and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. When he's not dabbling in digital marketing, you'll find him ultrarunning in the Rocky Mountains of Colorado. Jesse studied Public Relations at Brigham Young University.


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