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.
Where Fundraising Comes In
To avoid tackling how to calculate your business break-even point, startup fundraising comes in to help you survive or grow until you can break-even. It can take time to build and perfect your product and sales model. Then to grow that to thousands of sales per month. It can take a significant amount of capital to grow to that many sales.
You need cash to pay salaries, overhead, and other expenses to get through those months. You may also be investing in inventory and infrastructure before revenues come in and hit your bank to cover costs.
This is true even when you are selling and taking lots of orders. Many go broke in their best month because they don’t have the cash to fill the orders and get paid.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
Beware Of Breakeven Estimates
Even the best thought-through break-even analysis calculations and forecasts are typically deeply flawed.
Expect everything to cost more than you expect, take longer to achieve than hoped, and to make less than expected too. This is key when thinking about how to calculate your business break-even point.
Build some cushion into your plans to account for this. Have extra money in the bank, plan to raise more money, and earlier than you think you need.
How To Hit Breakeven Point Faster
So, whether you need to hit breakeven faster in order to pursue this venture, or you see trouble ahead and want to swiftly navigate back to the security of breaking even, how do you speed it up?
Raising your prices is one way. This is probably not going to turn out well in a crisis, or if you are just hiking prices without giving more value and better service. It may just make your customers turn on you. That may not show up immediately, but when they have a choice, expect them to revolt and give someone else their dollars.
The alternative is to add more value at no or a lower variable cost ratio. For example, could you raise that unit price to $30, without costing you more? Or raise them to $40, while only adding $5 in variable costs?
Cutting costs is the other choice. Or just don’t take them on in the first place. This may mean a leaner, remote team. If could mean working from home. It may be avoiding advertising trendy fad perks in your recruiting process. Ask how you can be more resourceful, and do more with less?
Typically knowing how to calculate your business break-even point is something that you would cover in your business plan which you can use internally for the 18 to 24-month roadmap of your execution. You may find interesting the video below where I cover in detail how to write a business plan.