How to calculate your business break-even point and what are the steps to get there with your business? This is without a doubt the question that every entrepreneur faces.
You are probably aiming for your business to do far better than just break-even, but you have to break through this milestone first. So, how do you get there? What’s the math? How can you speed it up, or get back there?
What Is The Breakeven Point?
The breakeven point in business is when your income and expenses line up. You aren’t really turning a profit, but you aren’t bleeding money every month either.
According to FreshBooks it takes a startup an average of two to three years to get to breakeven point. Many never do. Making running out of money the top reason for business failure.
This is a fact that few entrepreneurs and aspiring business owners get. Most probably wouldn’t go in knowing it would take so long to become a profitable business. One of the top reasons for this is that few really seem to do real math on breaking even in the first place. Or at least they get it very wrong.
So, when it comes down to how to calculate your business break-even point what are some of the ways to do so to get to real profits in your pocket?
Why Knowing Your Breakeven Point Is So Important
For years it was trendy to just go fast, go big, and be happy losing billions on the way to a big exit. That strategy doesn’t always work. Outside economic forces can be seriously disruptive if that is your only plan.
At least having a plan and path to get back to breakeven point means being able to weather these storms, and survive to thrive in better days. Without that you can be in serious trouble. No matter how much your company was worth on paper last quarter or how much money is passing through your accounts.
If you can break-even, then you can hold your own. Even in good times you’ll be in a much stronger negotiating position. You can raise money if you want, and on much better terms. Or you can hold out and wait until the markets are in better shape to raise again or sell your company for much more.
When you are wondering how to calculate your business break-even point, keep in mind that calculating the break-even point is also about knowing when you can quit your job, how long to commit to testing it, how much money you need to go all-in on this. and the goals your team should be hitting.
Calculating Breakeven Point For Startup Business Owners
For those of you wondering how to calculate your business break-even point, the simple formula for estimating your breakeven point is:
Break-even = Fixed costs divided by price per unit – variable costs.
So, if your fixed costs are $10,000 per month, and you are selling your product for $20, but it costs you $10 to make and sell each one, your breakeven point is selling 1,000 units.
You’d need 1,000 sales each month to cover your costs and bills, and to stop going in the hole.
Or you could say you need $20,000 in sales.
You can use the same formula for calculating how much you need to sell to make the income or desired amount of profit.
In order to gross $120k a year profit as the sole owner, you would need to sell 2,000 units per month. 10x that to make $1.2M.
Then, of course, you need to divide this up if you are bringing in partners, equity investors, or are giving stock to key team members as well as folks in your advisory board.
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