Understanding Your Break-even Sales Point

One of the most important lessons of this great recession is the Break Even Sales Point.  Small business owners need to get familiar with this simple concept.  Understanding your break even point will help with the financial management of your business.

First, the break even point is the minimum amount of sales/revenue that you need to support the business, or break even.  In other words, how many widgets do you need to sell in order to avoid losses.

In order to understand this, you need to know the following basic numbers and concepts:

1. Gross Profit Margin on a per item sale.  In other words, how much in profits do you make when you sell a product, which is the sales price less cost of goods, cost to manufacture, and any other direct costs (such as labor).  Example: 70%
2. Average monthly expenses.  Assume you have NO work or NO orders.  How much overhead would you still need to pay.  Consider administrative payroll, rent, utilities, phone/internet, office supplies, etc.  Example: $10,000
3. Divide your Average Monthly Expense number by your Gross Profit Margin number.  That result is your break even sales amount.  Example: $14,286 ($10,000 divided by 70%).

Now, you can divide that sales number by the price per item to find out how many items you must sell to break even.

Understanding this will help you stay focused on running a successful small business and ensure that you avoid unnecessary losses and the catastrophe of waiting too long before making changes.