Your Breakeven Point: What It Is and Why You Should Know It

Your business incurs costs in order to turn a profit. It’s the old “spend money to make money” maxim. But how much money should you spend? And when will you make a profit?

The point at which you stop losing money and start earning a profit is called the “breakeven point”. When planning your business (either at the very beginning or in any given period), knowing your breakeven point will give you a goal to work towards and some clear direction to manage your costs and prices.

Just add up all of your expenses – both fixed expenses and variable expenses – in a month (or whatever period you work in). That’s your breakeven point. Now figure out how many units you need to sell to reach that number.

Here’s why you need to know it:

• If you know your costs, you’ll have a better idea of the relationship between what it takes to run your business and what you have to produce to be profitable.

• You’ll also know how long it will take you to achieve your breakeven point. If you know this every month, this is your magic number to work towards. If you sell that many units on the 20th of the month, you’ll have 10 days of “pure profit”; next month try to sell that many units on the 18th.

• You’ll have a better idea of how business decisions – like new purchases or raising your rates – will move your breakeven point.

Take a moment to add up your breakeven point and use that as a benchmark to improve in the future.