Breakeven Analysis

Breakeven analysis can mean the difference between making money in your business or going broke. Breakeven is defined as the sales volume at which your revenue exactly covers the costs of running the business. When you are at breakeven, you are neither making money nor losing money.

Breakeven works like this. Let's say that the only items your business sells are widgets. You buy them for $2 each and sell them for $3. Your total operating expenses are $50 per day. What is the daily sales volume at which you neither make nor lose any money (your breakeven point)?

$150    Sales (50) widgets 
$100    Cost of Goods Sold (variable costs—50 widgets @ $2)

$  50     Gross Profit
$  50     Less: Operating Expenses (fixed costs)

$     0    Net Profit

Your breakeven point is 50 widgets or $150 in daily sales. Breakeven can be computed with a simple formula. First, compute your gross profit percentage (gross profit divided by sales). In our example, gross profit percentage is 33.3% ($50 ÷ $150). Then divide your fixed costs by your gross profit percentage to arrive at breakeven. That's $50 divided by 33.3% or $150, which is the breakeven point in our example.

Our example is oversimplified to illustrate our point, but the breakeven formula can be used in any business. It is necessary to properly identify "variable costs" (those that vary directly with sales volume) and "fixed costs" (those which do not vary with sales volume) to accurately compute your breakeven point.

If your business is losing money, knowing your breakeven point will tell you how much sales must increase to eliminate the losses. If you are making money, the analysis could help you increase profitability. Call us; we would be happy to assist you with calculating your business's breakeven point and evaluating your profit structure.

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© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010601.