Strategy Session

What Is A Breakeven Point?

breakeven point financial model revenue Jul 14, 2022

So one question that doesn't come up enough when we're talking with business owners is what is our break even point?

And I'm bringing this FAQ to you because I think this is a question that every single business owner needs to ask themselves.

So to take a step back, what actually is break even and break even point in our business?

And why is it so important? 

So to look at the actual definition, break even is when we hit a volume of revenue inside our business where our bottom line income is zero. It's the actual target that we have to hit before our business starts actually making money. So if we understand, again, the financial model is made up of revenue variable cost equals gross profit, less fixed expenses equals our net income.

What we're trying to figure out is what revenue target that turns that bottom line income into zero. So it's super important because if we don't maintain or at least hit that top line revenue number, that gets us to zero. That means we're going to be losing money every single month. So the break even point is that specific revenue dollar that makes our business equals zero.

So let me give you a bit of an example. In a business we're selling, let's say we're selling computers, we have one computer, no customization, the computers we sell for $1,000 and every computer costs us $500 to manufacture. At the same time, we're trying to figure out our break even point again, our break even point is where net income equals zero.

So if we have a computer business and there's $10,000 of expenses in their fixed costs, that will be rent, insurance, on an annual basis, we need to understand how many computers we need to make in order to generate net income zero. So when we're thinking of $10,000 of fixed expenses, we need a gross profit of $10,000 in order to hit break even zero. So if our gross profit is 10,000 and we're making 50% off every computer, that would mean we need to sell $20,000 worth of computers or 20 computers at $1,000 at a 50% profit would give us $10,000 profit, fixed expenses of 10,000, net income zero. So that is our target before our computer business makes any money, we need to sell 20 computers in order to get to break even zero.

Now why is this relevant for you inside your business?

When you're thinking of developing targets and revenue targets inside your business, you need to understand that at a minimum, you need to sell 20 computers for your business, break even and make payroll, right?

So when we're looking at targets, we know our targets have to be higher than 20 computers a month, maybe it's 100 computers a month. The sky's the limit. However, we know that the break even point, the minimum sales target we need for our business to be sustainable is those 20 computers a month. 

So thinking of next steps or how you can implement and understand break even inside your business, you need to fully understand what your fixed costs are and what your gross profit margin is inside your business. We need to know how many sales we need to make to cover off all our fixed expenses so that we're at break even zero. And again, it's super important that we understand this so that we know that this is a minimum target our business needs to deliver on to continue to be sustainable into the future.

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