Last Updated on October 6, 2022 by Dave Schoenbeck
How do you know when you break even in your business? Have you ever thought about it?
Every business owner wants to make a profit, but some set pie-in-the-sky goals that aren’t backed by the reality of their costs and pricing.
As a result, the break-even point in sales is an important metric to measure and review. Here’s what you need to know about breaking even.
What Is Meant by Break-even Point?
According to the United States Small Business Association, “The break-even point is the point at which total cost and revenue are equal, meaning there is no loss or gain for your small business.” In other words, as the name suggests, it is the point at which you have finally “broken even” in your small business venture.
The break-even sales formula is this:
Total fixed costs per specified period / (Sale price of each item – variable costs needed to produce each item) = number of the units required to reach the break-even point for that period.
You can tweak this formula to find the dollar amount of your break-even point if it aligns better with the KPIs you measure.
Why Is Break-even Important?
When you have a budget and know your break-even point in sales, it’s easy to estimate or forecast when your business will first become profitable in the day, month, quarter, or year. You will be able to see if adjusting your pricing is necessary when you have a fuller picture of your company’s costs vs. profits. Pricing awareness will help you stay competitive in the marketplace.
In addition to keeping your pricing competitive, you can use this figure to help set realistic revenue goals for your business. Using hard data is always your best bet when charting a course forward.
Knowing your break-even point in sales is often crucial for securing investors and appeasing stakeholders down the line. If you learn to use this figure early in your business, you’ll be better prepared to talk about it when it comes.
Finally, finding your break-even point in sales and communicating it to your team can boost performance and morale. Employees can become frustrated when they can’t see the bigger picture in their work. Explaining the break-even point can give them context for the company’s profits and help you set meaningful goals for output.
The break-even point is a significant starting number for many aspects of your business. Therefore, it’s a good idea to keep this figure in mind and revisit it frequently as your organization grows. Over time, you should be able to see the effects of your business’s sales strategy reflected in this calculation—hopefully for the better.
Want to move beyond the break-even point in sales to even more sales techniques? As a business coach, I have many articles about leadership, sales, and more. Click here to sign up for my email list to get these free blog posts delivered to your inbox weekly.
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