What is break-even? I could give you a multitude of different definitions and formulas that could make your head spin. However, I think I will opt for the down-to-earth definition. Break-even is the point at which you are not making any money and you are not losing any money. You are simply breaking even.
Knowing your break-even point is one of the most important pieces of information that a business owner should know. Whenever I ask someone if they know what their break-even is, I always get the answer of “I have a ballpark idea of what it is”. This is not good enough to make important decisions in your business such as hiring additional personnel, buying a piece of equipment, or offering a new product or service. You need to know exactly how much money it takes to break-even.
There are a variety of different ways to calculate your break-even point. For the sake of this blog, let’s use the simplest one, which is:
Breakeven = Fixed Costs (FC)/Gross Margin (GM)%
Fixed costs are any costs that your business incurs whether you make money or not, such as, rent, utilities, insurance, taxes, office expenses, etc. Gross margin percentage is what you make after pay immediate expenses associated with the product or service you offer. This could be materials to make the product, payroll for the service, and even sales commissions.
Next week we'll look at an example of how to calculate break-even. And when I say we, I mean me, my wife, and the one other random person that may read this.
The TSBDC offers free and confidential one-on-one counseling for existing and start up small businesses. To register for go to www.tsbdc.org.Other contact information - Phone (615) 230-4780 www.volstate.edu/tsbdcThe Tennessee Small Business Development Center Network is funded by the U.S. Small Business Administration and local community donors.
Knowing your break-even point is one of the most important pieces of information that a business owner should know. Whenever I ask someone if they know what their break-even is, I always get the answer of “I have a ballpark idea of what it is”. This is not good enough to make important decisions in your business such as hiring additional personnel, buying a piece of equipment, or offering a new product or service. You need to know exactly how much money it takes to break-even.
There are a variety of different ways to calculate your break-even point. For the sake of this blog, let’s use the simplest one, which is:
Breakeven = Fixed Costs (FC)/Gross Margin (GM)%
Fixed costs are any costs that your business incurs whether you make money or not, such as, rent, utilities, insurance, taxes, office expenses, etc. Gross margin percentage is what you make after pay immediate expenses associated with the product or service you offer. This could be materials to make the product, payroll for the service, and even sales commissions.
Next week we'll look at an example of how to calculate break-even. And when I say we, I mean me, my wife, and the one other random person that may read this.
The TSBDC offers free and confidential one-on-one counseling for existing and start up small businesses. To register for go to www.tsbdc.org.Other contact information - Phone (615) 230-4780 www.volstate.edu/tsbdcThe Tennessee Small Business Development Center Network is funded by the U.S. Small Business Administration and local community donors.
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