Article by Roger Schlueter, MBA
The Break-even Point for a business is The Amount of Sales where the company does not make any money but does not lose any money either. The Amount of Sales where the company literally Breaks Even. This number is asked consistently by banks when applying for a loan. Most bankers know that it is but I would challenge most bankers to show me how to arrive at Break-even off the top of their head. I guarantee that you will impress, even the most critical banker, if you can tell him the Break-even Point of your business, especially if the business is a Start-up Business.
The Formula for Break-even Point is:
Break-even Point in $ (dollars) = Fixed Expenses (divided by)
Contribution Margin ( ratio of %)
O.K. , Now WHAT IS A CONTRIBUTION MARGIN ?
You need to compute the Contribution Margin in dollars then convert that number to a Percent (%) by dividing by the total Sales figure.
Contribution Margin:
Sales dollars $100,000
– (Minus) Variable Expenses $ 40,000
= Contribution Margin $ 60,000
Contribution Margin as a percent (%) 60,000 / (divided by) 100,000 = 0.60 or 60%
Fixed and Variable Expenses:
Fixed Expenses are Expenses that your company has to pay even if you have no Sales. Examples are Rent, Electric (to a point), Salaries (to a point), Insurance, Property Tax, Maintenance, Interest or payments on loans, Etc.
Variable Expenses are Expenses that your company incurs when you have Sales. Examples are Purchases of Product, Labor to produce Product, Electric increase, Sales Commissions, Shipping, Mailing Costs, Etc.
Final Example using above information and with Fixed Expenses at $20,000.
Remember the Formula ?
Fixed Expenses for the period $20,000
/ (Divided by) the contribution Ratio 0.60 (60%)
= BREAK-EVEN POINT IN $ (DOLLARS) FOR THE PERIOD IS $33,333
THIS $33,333 IS THE SALES YOU MUST MAKE TO BREAK-EVEN. ANY ADDITIONAL SALES AND YOU WILL BE MAKING MONEY. THE EXAMPLE PUTS THE REAL SALES AT $100,000 AND IF THIS WERE TRUE THEN YOU WOULD BE MAKING PROFIT ON EVERY ADDITION DOLLAR OF SALES OVER THE $33,333.
This is not an indicator of Profit, the Income Statement or Profit and Loss Statement is the determining factor of Income and profits. This Break-even Point tells you the Sales you Must Make to cover your costs, and that any additional sales you will be making money.
Please see my website at www.schlueterfinancial.com for contact information or additional information.