How do you calculate a break-even point (also called the ‘profit threshold’) for a new business? Our guide explains how to calculate it — and why you need to know it.
In the simplest definition, the break-even point is the month in which your revenue (revenue/revenue) and expenses (costs) are the same. If you overcall the break-even point, you make profits. If you lower the threshold, you make losses. It’s that simple. In what month does your company’s loss turn into profit from your initial investments? Use our guide to calculate a break-even point.
Formula to calculate a break-even point
With our help you can calculate how long it will take you to break-even point. First write down the sum of your initial investments, then the sales you expect in an average month. And finally, the sum of all costs in an average month.
By the way, with all values, the “rough thumb” is enough – you have to become more precise in the business plan.
So… to accurately work out your break-even point, just use the following formula (as shown in the infographic below as well):
Fixed Costs ÷ (Price – Variable Costs) = Breakeven Point in Units
Put another way, the break-even point equals the total of your fixed costs divided by the difference between the unit price and variable costs. Fixed costs in this formula are calculated as the total of all your business overheads, but Price and Variable Costs are your per-unit costs—which means the total of what it costs you to produce each product unit you sell.
For example, if you need to invest $10,000 and make an average of $5,000 in sales at a cost of $4,500 in the first few months, you’ll reach the break-even in month 20.
Why you need to know
Break-even is an important factor in assessing the chances of success of your business model. Especially if you are looking for a classic financing (e.g. from a bank or savings bank), it must be foreseeable that you will reach the profit threshold within a few years.