How to Calculate the Breakeven Point for Your Business

At the breakeven point of a business, income is equal to expense and therefore there is no gain or loss. It is the starting point from which an increase in sales or a reduction in costs generates a gain and a reduction in sales or an increase in costs generates a loss.

Why Calculate the Breakeven Point?

The breakeven point is an important reference point that enters into planning and carrying out business activities. By clearly understanding the level of sales needed to cover all costs, you know how many units you must produce, in the case of a manufacturing business, or how many units you need to purchase and sell, in the case of a merchandising business. In a services business, the breakeven point indicates the number of billable hours you must work in order to cover your costs.

The Calculation

At the breakeven point: revenue = fixed costs + variable costs.

Therefore, in order to calculate the breakeven point, you need to determine all the fixed and variable costs involved in the operation. Fixed costs are those that are invariable, and that must be paid regardless of the level of sales. Variable costs are incurred in proportion to the level of sales.

Fixed Costs

Some examples of fixed costs include: the cost to rent an office, shop, warehouse, factory, or other facilities; base salaries and wages of employees; employee benefit plans, maintenance contracts; contracts for cleaning and security services; advertising contracts; insurance; base costs of utilities such as electricity, gas, water, and sewage; base costs of telephone land lines or cellular telephone; Internet connection; the monthly cost of a domain and website; real and personal property taxes; licenses and permits; depreciation and amortization; and interest and other debt service expenses.

Variable Costs

Examples of variable costs include raw materials and supplies; freight; rental of machinery, equipment, and tools for specific jobs; fuel; employee overtime pay; temporary contract labor; repairs and maintenance; office supplies; telephone calls; travel expenses; and sales commissions.