Calculating breakeven sales is a critical business skill

August 10, 2010

With capital as tight as it is and revenues for many companies down, calculating your company’s breakeven sales is a skill that can help you better plan and manage your fixed and variable costs. Small business owners who are struggling with profitability should calculate their breakeven sales so they have an accurate understanding of how much they need to sell each month in order to make a profit. The exercise is pretty easy but you have to know some terminology:

Annual fixed cost: This is the total of all business overhead costs anticipated on an annual basis. These are costs like rent, insurance, property taxes, some salaries, and any expenses that aren’t tied to making or selling your product.

Annual variable cost: This is “cost of goods sold,” which includes raw materials, direct labor, sales commissions, sales related expenses, freight, and the energy costs associated with making a product.

Contribution margin: This is the amount of money in annual sales revenue that exceeds annual variable costs. It is called contribution margin because it contributes toward paying fixed costs.

Annual sales revenue: This is the revenue from selling your product or service. In order to calculate your company’s breakeven point, you must estimate your annual sales as accurately as possible. When the contribution margin exceeds fixed costs a company has a profit. When contribution margin is less than fixed costs the company is loosing money. Here is the formula for calculating breakeven sales:

Breakeven Sales ($) = Total annual fixed costs
Contribution margin / Annual sales revenu

Using an example of a company that is projecting annual fixed costs of $80,000 per year, variable costs of $120,000 / year, and anticipated total sales of $200,000 the calculations would look like this:

Breakeven = $80,000 / ($80,000/$200,000)
Sales of = $80,000/ 0.40
($16,666) per month = $200,000

In this example the breakeven point is $200,000. If sales per month are relatively equal, the monthly breakeven point would be $16,666 per month ($200,000 / 12) The phrase garbage in, garbage out applies here. Make sure you total all estimated fixed and variable costs as accurately as possible and are realistic about your annual total sales.

Topics: Operations, Sales, Management, Articles

Leslie Thacker

Business Finance Solutions

Leslie Thacker is the Managing Partner of Austin Texas-based Business Finance Solutions. Leslie has over 20 years of general business experience, including ten years managing the marketing, sales, and projects for financial services including bank lending programs and electronic data interchange programs for small businesses. She has served as a consultant to several banks and a small business investment company (SBIC). Her role in Business Finance Solutions includes assisting small and mid-sized businesses obtain working capital financing, equipment leasing, and leveraging other assets for working capital. Before entering the financial industry, Leslie was the publisher of a business trade publication in Corpus Christi. She also has an extensive background in inventory control and merchandising. Leslie is passionate about helping business owners, managers, CFOs, and operations personnel obtain valuable practical business training. In March 2009 she started a highly successful Austin based Meetup group. Each month she has arranged a respected speaker to present a finance or operations topic of interest to the group. There are now approximately 180 members of the group. Leslie also volunteers time at the Texas State Small Business Development Center, assisting with educational programs and the center’s marketing program. When not helping businesses find financing and practical educational resources, Leslie spends time in her garden growing antique roses.
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